Could Budget Cuts Keep Your Flight Grounded This Summer?

The Federal Aviation Administration has been forced to cut its 2013 budget as part of the sequester mechanism implemented to reduce the federal deficit. In order to cut costs, the FAA is furloughing all of its workers for one day every other week through September. The cuts will have a large impact on the capacity of some major hub airports, depending on the time of day and weather conditions. As a result, the FAA has warned airlines and travelers that they could face excessive delays in some cases.

While some members of Congress have complained that the FAA could have saved money elsewhere in its budget, and a number of airlines sued in federal court to block the cuts, these efforts have so far been unsuccessful. The FAA furloughs went into effect this week. Effects were already being felt in Los Angeles and New York by Sunday night and Monday morning. If these cuts remain in place during the busy summer travel season, fliers could face massive delays and some travelers might avoid flying altogether. This could have a significant negative effect on airlines.

Early effects
The first major signs of trouble became visible on Sunday in Los Angeles. With three fewer controllers per day in the tower at Los Angeles International Airport, the airport experienced delays of up to three hours on Sunday night, with some airlines canceling flights to avoid the backups. On Monday morning, the focus shifted to New York, where all three major area airports faced significant delays.

There were also reports on Monday that the Washington, D.C., airspace was overloaded due to the cutback in controllers. Some southbound flights from Newark Airport had to turn back because Washington air traffic control could not accommodate them. Associated Press pointed out that an 8 a.m. US Airways (NYSE: LCC  ) Shuttle flight from Washington to New York left the gate on time but had to wait almost two hours to take off, causing it to arrive in New York later than the 8 a.m. Amtrak Acela train.

Risks for the airlines
Airlines face two distinct risks if FAA furloughs remain in place during the summer travel season. First, customers could choose to avoid flying altogether, if they become worried about the likelihood of delays. People could choose to drive or take the train to avoid short flights like the airline shuttles between New York, Boston, and Washington. Vacationers may choose nearby destinations so they can drive rather than dealing with the hassle of flying. This could have a significant impact on airline revenues this summer.

The other danger for airlines is that passengers who do travel will become disgusted by the delays. Airlines already have a hard time keeping customers happy, and cascading delays will only make it harder to deliver acceptable customer service. A further ratcheting up of customer discontent could continue hurt the most-affected airlines for months or even years after the end of FAA furloughs.

United Continental (NYSE: UAL  ) and American Airlines (UNKNOWN: AAMRQ.DL  ) could be affected the most. The two carriers were already at the bottom of last year's Airline Quality Rating survey. Furthermore, both airlines have a strategy of building hubs in the top business markets. These cities – such as New York, Chicago, and Los Angeles – tend to have the most crowded airspace. As a result, these carriers are likely to have multiple hubs hit with significant delays on peak travel days, which could snarl operations across their systems. JetBlue Airways (NASDAQ: JBLU  ) could also see a disproportionate effect because its main base of operations is at New York's busy JFK Airport.

Foolish conclusion
Investors should not panic yet; it is possible that a few days of delays will force Congress and the FAA to compromise in order to avoid a national air traffic mess. However, political gridlock in the U.S. could lead to a continuation of the status quo, which could anger travelers and hurt profits at a number of major carriers. With most airlines reporting earnings this week, it will be useful for investors to hear what industry executives have to say about the problem and the ways to minimize the effect on customers.

Solid companies selling at depressed prices have consistently helped generations of the world's most successful investors preserve capital, minimize risk, and achieve long-term, market-trampling returns. For one such company, read our free report: "The 1 Remarkable Stock to Own Now." Just click here to get started.



Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2380854, ~/Articles/ArticleHandler.aspx, 7/25/2014 3:41:42 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement