What Airport Costs Say About Airlines' Margins, Competitiveness

In a note released Wednesday, Bernstein analyzed the footprint costs of airlines' and what airport costs mean for the margin gap between

Airport Costs: Key Margin Differentiator

Analyst David Vernon said where each individual airline flies is a key contributor to margin differentials and relative competitiveness, given that the cost of operating at large airports varies notably around the U.S.

Delta, The Cheapest; United, The Most Expensive

Taking the largest 34 airports and airport systems as proxy, the analyst thinks the blended cost per passenger enplaned for each airline is the lowest for Delta Air Lines, Inc. DAL, which has a cost of about $8.94.

Southwest Airlines Co LUV and American Airlines Group Inc AAL followed with a cost of $9.88 and $11.36, respectively. The operating cost per enplanement at $11.36 is the highest for United Continental Holdings Inc UAL, the analyst said.

Bernstein indicated that higher airport operating costs contributed to structural margin differences between carriers, with the rental and landing expenses for Southwest and United Continental at 5.9 percent of the revenues, while Delta's is at a low of 4.4 percent of the revenues.

Going by the 290-basis-point gap in rental and landing expense as a percent of revenue and the firm's bottoms-up analysis of airport operating costs, the firm concluded that the cost of where carriers fly into and out of drives a sustainable difference in margins.

Although the firm expects the gap from this source to narrow, it said the 100–200 basis points of the 570-basis-point-spread between Delta and United Continental margins could be based on operating out of higher cost airports.

"We think this stands in contrast to some market participants' views that the margin gap between the carriers will disappear over time," the firm opined.

Delta Immune To Fee Hike By Airports

Bernstein also looked at the likelihood of a rise in fees of airports, as six of the top 34 airport/airport systems surveyed by it lost money. The firm sees limited risk of these airports raising fees. The firm noted that American Airlines is the most exposed to loss-making airports, though the risk to margins is minimal.

However, Bernstein sees Delta benefiting doubly from its high exposure to ATL, which has the lowest cost of all major U.S. airports and is also net income-positive. Accordingly, the firm said the risk of fee pressure at Delta is smaller than it is for other carriers.

Rating/Price Target

  • Delta: Outperform/$60.
  • Southwest: Outperform/$70.
  • United Continental: Market Perform/$86.
  • American Airlines: Market Perform/$52.

This Week's Earnings, Latest Figures

  • Delta reported Thursday Q2 EPS of $1.64 versus estimated $1.53 with sales of $10.79 billion.
  • American Air reported June RPMs Wednesday up 0.8 percent, ASMs up 1.1 percent, load factor down 0.2 points. Raised Q2 TRASM growth Outlook from 3.5–5.5 percent to 5–6 percent year over year.
  • United narrowed Q2 outlook Tuesday, consolidating passenger unit sales growth from 1–3 percent to roughly 2 percent. June metrics reported: consolidated RPMs up 3.4 percent, consolidated ASMs up 5 percent, passengers up 4.6 percent.

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