Will This Airline Make Your Travel Even More Stressful?

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Today, a
report from the Wall Street Journal
noted that dozens of flights from Europe to the US East Coast have been forced to make nonscheduled stops to refuel. The flights have primarily been from United Continental
UAL
as the airline has attempted to use smaller airplanes such as the Boeing
BA
757 which has a lower fuel capacity in an effort to cut costs. While this helps to keep costs down during good weather, the region has experienced heavy winds over the past month, forcing the planes to burn more fuel, which eats into reserve levels. United reported that 43 of its flights were required to make unscheduled stops, inconveniencing some passengers and forcing others to miss connections. The airline has offered compensations to some affected passengers, but that has not done much to alleviate frustrated travelers. The FAA has already started to investigate the issue, but has stated that the airline has not violated any safety regulations. However, aircraft that constantly run low on fuel could pose a hazard if the flight is delayed and force air traffic controllers to give them priority when landing. The issue is just one of many that airlines face when trying to stay afloat. The bankruptcy of American Airlines
AMRAAMRQ
has highlighted the many difficulties that airlines face in trying to balance the high price of fuel costs, expensive plane maintenance, and offering competitive fares. The airlines have also moved to cut expensive pension plans, turning them over to federal agencies. This will prove to be a big blow to retirees, as high paid workers will see their pensions cut by up to 50%, while lower paid workers will see up to a 20% decrease. It's becoming apparent that great service and low pricing are not two factors that can be easily paired in the airline industry. Many airline passengers seem to have a lot to complain about today, from high fees to inattentive customer service. While the process of flying seems to be getting more frustrating, customers have forgotten its primary goal: convenience. The airline companies are responding by cutting routes and using smaller planes, as it would be nearly impossible to turn a profit without those strategies. Investors have long been wary of airline companies. These companies cannot be judged on fundamentals alone, as a long list of costs and reliabilities can turn a healthy balance sheet upside in a matter of months. Investors will want to monitor the monthly airline traffic numbers closely, as the best way for airlines to stay in the air is to ensure that all their planes are full.

ACTION ITEMS:

Bullish:
Traders who believe that the economic recovery will result in increased airline traffic should consider these trades:
  • Buy shares in airline stocks like United Continental, Delta Air Lines DAL, or US Airways LCC. These companies could see solid revenue growth if people decide to vacation more or if businesses need their employees to fly again.
  • Go long an ETF. This provides another way to invest in airlines, but spreads your risk out among several companies.
Bearish:
Traders who believe that passengers will shun the airlines due to frustrating customer service and high fares should consider these trades:
  • Go short airlines like Lan Airlines LFL, Southwest Airlines LUV, or China Southern Airlines ZNH. Airlines are always a risky investment, and a fall in airline traffic would hit all companies.
  • Go short an airline ETF. This allows you to take a position against the airline industry, but protects you should one or more companies generate abnormal revenue growth in the coming year.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.
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