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How Much Longer Can the Good Times Last for Airline Stocks?

By Motley Fool Staff - May 7, 2016 at 10:18AM

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Cheap oil and gas prices have given airlines a big boost to the bottom line. The real question is whether they will be able to improve operating statistics enough to keep the good times rolling when oil prices rise.

Air travel has experienced unexpected growth in the past couple of years, thanks to cheap oil.

In this segment from the Industry Focus: Energy podcast, Sean O'Reilly and Tyler Crowe look at a few of the signs of impending struggle in the air travel industry, and why they'll spell pain for a lot of players when the price of oil recovers from the abysmal low it's at now.

A full transcript follows the video.

This podcast was recorded on April 22, 2016. 

Sean O'Reilly: A lot of people talk, all these articles I read, edit, and occasionally contribute to, that talk about the automakers, GM and Ford or whatever. They're selling just about as many cars as they ever have or arguably ever will. Is it the same case with both autos and airlines, that it's probably as good as it's ever going to get? Unless population explodes or something.

Tyler Crowe: It really depends on where you're looking. Certainly in the United States, there is some room to grow with regional travel; it is still a growing industry. It's an ungodly competitive industry. When you have flat lining numbers on passenger revenue per available seat mile --

O'Reilly: I can't believe the profits that these companies have been making these last few years. You had David Tepper making a couple of billion dollars off buying them after the Great Recession. I grew up reading about Warren Buffett as a teenager. Rule No. 1: Stay the heck away from airlines.

Crowe: Well, you also have to take into account when you look at somebody like Warren Buffett; he's looking at it across the cycle. It looks like we're on one of the up cycles in the airlines where fuel is cheap, everybody wants to fly, economic conditions are good. Those are when the opportunities are. The big question will be, can they carry some of that momentum into when oil prices start to increase? That's going to be the biggest question for them going forward. How long is this party going to last with oil prices? At the same time, when you look at those flat-lining numbers for passenger revenue per available seat mile, it starts to wonder, how much more competitive are these people going to get when it comes to fares and fees? Let's face it: Airline travel has become a race to the bottom when it comes to prices nowadays. It's why a company like Spirit Airlines (SAVE 2.98%), as miserable of an experience as it is to fly on a Spirit Airlines plane, I don't know if you've flown it but it wasn't exactly the best experience I've ever had.

O'Reilly: Even with Southwest (LUV 1.69%)--

Crowe: It is cheap. Oh, my goodness, is it cheap.

O'Reilly: My flight to Port Columbus airport in Ohio last week, I booked a month and a half in advance. My flight was $69 one-way on Southwest. I got peanuts and a Coke. It was great.

Crowe: But again, it's the race to the bottom.

O'Reilly: It is a race to the bottom. They did not make money on me.

Crowe: Dynamic pricing model where you bought it a month out and it's going to be cheaper than if you had waited a week.

O'Reilly: But now it's $200.

Crowe: You have those sorts of dynamics going on. It will be interesting to see what happens with fares. We're starting to see a little industry consolidation, with Alaska (ALK 2.80%) buying Virgin America (VA) and things like that. If industry consolidation does happen a little bit more, will they be able to raise prices a little bit because the amount of competition won't be as robust.

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Stocks Mentioned

Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
LUV
$36.73 (1.69%) $0.61
Alaska Air Group, Inc. Stock Quote
Alaska Air Group, Inc.
ALK
$41.17 (2.80%) $1.12
Spirit Airlines, Inc. Stock Quote
Spirit Airlines, Inc.
SAVE
$24.55 (2.98%) $0.71
Virgin America Inc. Stock Quote
Virgin America Inc.
VA

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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