Airlines’ big cuts buoy stocks and beat up consumers
Investors in airlines are nervously awaiting United’s (UAUA) earnings report Tuesday. Last week’s announcements from American Airlines (AMR) and Delta (DAL) spotlighted the awful state of the industry — and the opportunities for vulture investors. When AMR Corp. and Delta announced second-quarter losses of $1.4 billion and $1 billion, respectively, their stocks surged 32% and 27%.
Amazing, isn’t it, that this level of pain is considered positive news for the airlines? Most of the losses are due to writedowns related to impending reductions of U.S. service. In fact, the major airlines are cutting back more now than anytime since right after 9/11. Delta, which is due to merge with Northwest (NWA), plans to reduce its domestic service by 13% in the second half of this year — and add flights abroad, where the growth lies. On Sunday, Midwest Air Group (MEH) announced that it’s grounding one-third of its planes to reduce costs in the wake of crippling fuel costs. Among the cities losing service: San Diego, Baltimore, St. Louis, and Fort Lauderdale, Fla.
These cutbacks aren’t good, of course, for so many communities across the United States. Last week I flew to San Luis Obispo to visit my childhood friend Diane, her husband Tom, and their two boys. San Luis Obispo — or SLO, as the locals say — is a charming city along California’s Central Coast (home of High School Musical’s Zac Efron!) and one of my favorite places to visit. Delta and American both are ending service here in the coming months. Paranoia runs so deep that a United worker at the SLO airport on Saturday told me that he’s heard rumors from a dozen people that United may be ending service there too. “We’ll probably be the last to know,” he said nervously. United hasn’t disclosed any such plans. But if it pulled out, San Luis would be left with just one carrier, U.S. Airways (LCC) — and higher airfares, for sure.
P.S. Investors ultimately may win from the service reductions, plus all those new fees for checked bags, frequent-flyer award tickets and more. The long-term losers will be consumers who pay higher prices for ever more annoying hassles in travel.