Time to Buy Airlines

[Marina Schwarz + 1,576]

Airline stocks have been pressured by rising oil prices, which was only to be expected, but soon they may be heading higher. Good times for conservative investors, I guess.

[TomTom + 183]

Most airlines have hedged fuel purchases for around 1 - 1.5 year at $50 - $60 per barrel. Investors are probably selling out of fear, so yea... it could be a good moment to buy them at a discount... if oil prices continue to rise, they could fall quite a bit further however.

[Jan van Eck + 7,558]

3 hours ago, TomTom said:

Most airlines have hedged fuel purchases for around 1 - 1.5 year at $50 - $60 per barrel. Investors are probably selling out of fear, so yea... it could be a good moment to buy them at a discount... if oil prices continue to rise, they could fall quite a bit further however.

The US air carriers will make money, and continue to make money, not because of fuel pricing, but because they have inexorably consolidated,  to the point where they have oligopoly pricing ability.  Also the carriers have segregated former cost centers, such as carrying luggage, into new profit centers by charging extra baggage fees. When you add it all together, the days of air carriers actually losing money are pretty much over.  The carriers that are in a more uncertain outlook are those that run as contract carriers for the majors; you see their planes as those small feeder machines connecting outlying airports.  What is little understood is that those planes, although painted in the colors of the majors, are owned by smaller companies that run on contract to the majors, and are paid "so much a seat."  It is an inherently unequal relationship, and the majors effectively siphon profits from those contractors and to themselves.  The immediate result is that the contractors pay much less in pilot and cabin crew wages than the majors, and have high personnel turnover as a result. Those companies are in constant turmoil and do risk a brush with the bankruptcy courts. 

The other segment of the air carrier industry that is under continuing pressure is that which services the "necessary air service" segment.  You have these routes out in the hinterland - places like Northern Michigan and Montana - that have such low density that nobody can make it work.  So the US Govt steps in with special subsidy contracts,and pays big gobs of cash to keep air service to those isolated small towns.  Again, those operators are under constant financial pressures. Trust this explains.