For Airlines, There's a Silver Lining in the Government Shutdown

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.

DOJ impairment
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 (UNKNOWN: AAMRQ.DL  ) . 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.

Cloudy skies
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.

2 airlines with a different approach
Warren Buffett has claimed that investing in airlines is a surefire way to lose your hard-earned cash. But two airlines are breaking all the rules by keeping costs low and avoiding direct competition -- leading to enviable profits. Click here to learn how these two airlines are leading a revolution in the industry, and discover whether they can keep delivering big gains for shareholders!


Read/Post Comments (2) | 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.

  • Report this Comment On October 02, 2013, at 8:22 PM, josephnordqvist wrote:

    Weak oil prices, plus a surge in the airline industry.

    It seems that investing in airlines may be the way to go? I'd like to see Motley Fool do a full story on investing in the airline industry at the moment.

    According to Boeing, “Overall, the demand is driven by steadily increasing airplane deliveries, particularly single-aisle airplanes, and represents a global requirement for about 25,000 new pilots annually.”

    Link to the article: http://www.marketbusinessnews.com/airlines-will-need-500000-...

    Opinions?

  • Report this Comment On October 04, 2013, at 6:52 AM, philiptp wrote:

    Indeed, I would like to see more also on this subject. But you might be better off going to Aviation news Online. This editorial by Alexander is so very close to something I wrote 24 hours earlier on that site is is very scary indeed and not just a little bit worrying.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2666315, ~/Articles/ArticleHandler.aspx, 12/22/2014 5:46:16 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