Calyon Securities Analyst Ray Niedl expects government restrictions proposed by the FAA to reduce delays will benefit airlines since they would inevitably raise prices and reduce inefficient utilization of airline assets. Related Story
However, it would hit regionals the hardest. “Limitations on flights and/or higher landing fees could have a negative effect on the regional airlines,” he said. “Smaller aircraft would have to pay higher fees, producing economics that could reduce the viability of some of their operations. Restrictions on the number of flights would probably reduce the number of regional jets, since carriers would probably favor larger aircraft in a restrictive environment. Either action would further reduce growth opportunities for regional airlines.” Indeed, a recent DOT report found regional margins were eroding. Related Story
Neidl said government restrictions would reduce congestion and related costs (including the $9 billion in losses cited by DOT Secretary Mary Peters before the Airports Council International-North America meeting last week) Such changes would also lead to higher airline profits – and higher stock prices, said Niedl.
“In recent years, airline traffic has recovered to pre 9/11 levels and with it has come airport/airways congestion and delays,” he told investors in his e-letter. “Delays cost airlines significantly in labor, assets and fuel. In addition, delays cost the economy by creating inefficiencies for business travelers, as well as taking away personal time from travelers and causing the airlines ill will. These delays will invite meddling by politicians as complaints mount.”
He blamed the government for failing to keep pace with infrastructure needs, but also cited the airlines for “under-pricing their product, leading to year-round high load factors and asset utilization (including employees) that are [stressing] the system,” he said. “Regulators also bear responsibility because of how they price airport usage, assigning smaller aircraft and general aviation movements the same price as large aircraft to use the infrastructure, further clogging the system.”
He recommended a pricing reform for use of airport facilities, investing in the infrastructure both in terms of hardware and procedures; and, raising ticket prices to drive out the low-margin traveler to reduce the demand on assets and the system. “However, it appears that the short-term solution may be for the government to limit operations at the nation's busiest airports and in the entire Northeast region,” he said. “If this were to happen, it could be a blessing in disguise for the network since reduced operations would mean higher ticket prices and some relief of asset utilization. It would be mixed for the low-cost carriers in that it would limit their growth but, on the other hand, permit them to raise ticket prices as well. We believe that investors would react positively.”
Saying government actions are uncertain, Niedl noted the pressure that is building for reform. “It will take longer to put through the real reforms that are needed – increased investment in infrastructure – so a short-term solution restricting some operations may be imminent.”