On October 1, the government shutdown officially began. Although not the apocalyptic scenario portrayed by much of the media, the shutdown is generally seen as a negative for investments as payments from the government stop flowing to thousands of government employees and federal agency closures prevent actions by the government. But for airlines, there are two benefits to a government shutdown and, while they may not outweigh all of the downsides, are important to consider when deciding which companies will be most affected.
The biggest news in the airline industry is the ongoing legal struggle between the Department of Justice and two airlines that want to merge: US Airways (NYSE: LCC) and American Airlines parent company AMR (NASDAQOTH: AAMRQ). However, like other parts of the government, during a shutdown, the DOJ is likely to lose some of its abilities.
In fact, it already asked the court to delay the merger trial on account of the shutdown. With that request denied by the court, both parties are still expected to head to trial on November 25. In the meantime, the airlines' legal abilities should not be affected to any significant degree while the DOJ will have fewer resources at its disposal.
It's impossible to know exactly how this will shape the trial, but clearly having more resources is an advantage in a closely contested legal fight like this. This merger, however, has implications for carriers other than US Airways and AMR. United Continental Holdings (NYSE: UAL) and Delta Air Lines (NYSE: DAL) also stand to benefit from such a merger as it would reduce the number of legacy carriers from four to three, further consolidating pricing power.
From the perspectives of US Airways, AMR, United Continental, and Delta, the DOJ having a more difficult time preparing its case is a positive since it provides US Airways/AMR an edge in successfully defending their merger.
Falling oil prices
Airlines are giant consumers of jet fuel and are thus highly sensitive to oil prices. However, one of the few positives of a government shutdown is falling oil prices as oil traders forecast a weaker economy.
Only two days into the shutdown, oil was already down to $102 a barrel, well off September highs and even below levels seen after the Syrian chemical weapons deal was announced. And on the eve of the shutdown, oil slipped to its lowest point in three months. If the government continues to stay shut down, oil traders are likely to continue fearing a weak economy, even if the economy ends up not being badly affected overall.
Falling oil prices following the government shutdown should help to hedge some of the adverse economic effects stemming from the shutdown so, as bookings temporarily slide, fuel expenses at least temporarily decrease.
The government shutdown has thrown uncertainty into a broad segment of the economy. At first, one would assume that airlines stand to be hurt the most due to the cyclical nature of their business. However, an impairment to the DOJ and lower fuel prices bring two positives to an otherwise negative situation. If Congress can agree on a solution quickly, the shutdown could be over by the time you read this article. However, in the event that Congress remains a disagreeable body, airline investors should consider the negatives as well as the positives when examining this industry in the face of current events.
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