There's a reason Warren Buffett won't invest in the airline sector: It provides no competitive advantage while costing enormous amounts of money to get off the ground and earns little to no money for the companies involved.
Airlines have dealt with myriad problems over the past decade including oil's ascension to $147 per barrel, terrorist attacks, and labor union disputes. I've long felt that a wave of consolidation would be needed in the airline sector if weaker players such as AMR (NYSE: AMR) or US Airways (NYSE: LCC) are going to survive.
With the airlines already on their knees in the face of rising oil prices, Sen. Mary Landrieu, D-La., this week introduced legislation that effectively kicked the airline sector one step further to a complete knockout.
The proposed legislation offers up two possible solutions to what she deemed to be overzealous fees charged by airline companies with regards to baggage fees. The first solution would be to eliminate baggage fees altogether for the first checked bag. The second, more compromising solution, aims to incorporate higher taxes on baggage fees charged by airlines. Either method is aimed at either collecting the $260 million in cash needed for the Transportation Security Administration to handle the increase in carry-on bags or reducing carry-ons altogether.
Now, before you start cheering this bill, keep in mind the implications this could have on the already struggling airline sector. Spirit Airlines (Nasdaq: SAVE) and Alaska Air (NYSE: ALK) both made extra revenue by charging for checked bags. (Spirit also charges for carry-on bags.) Then again, being regional providers, they are able to pass along lower ticket prices to consumers in return for these higher fees. Without these fees, it's very likely that regional airlines would lose their pricing advantage over larger carriers.
Also keep in mind just how dependent airlines are on baggage revenue.
Source: U.S. Department of Transportation.
Last year, baggage fees accounted for nearly $3.4 billion in revenue for the airline industry, so canceling the fee entirely, though great for us as consumers in the short term, could be crippling to the industry's cash flow. It might be tough to tell by this chart, but it's very likely that baggage fees will approach $4 billion in revenue this year when all the figures are in.
The primary baggage culprits according to the Department of Transportation are Delta Air Lines (NYSE: DAL), AMR, US Airways, and United Continental's (NYSE: UAL) fleet occupying the fourth and fifth spots (United and Continental merged in 2010). These five airlines are responsible for $1.28 billion, or 77%, of the $1.67 billion the U.S. airline industry has taken in so far this year.
Will anyone really win if this legislation passes? Perhaps passengers for a very short period of time before the airlines realize just how much of their cash flow will be affected and are forced to devise another way to charge passengers. This bill is still in its infancy in terms of passage, but it could be the first step toward paying a fee for using the lavatory on board your next flight.
What's your take on Landrieu's bill? Do you support it or think it'll kill the airlines? Share your opinion in the comments section below and consider adding these airlines to your free and personalized watchlist to keep up on the latest news with each company in the sector.
