Renewed Terrorism Threat Rattles Airlines

(page 2 of 2)

Labor and Fuel Concerns

Since 2001, travelers have gotten used to terrorism warnings and annoying security procedures, says Craig Hodges, portfolio manager of the Hodges Fund (HDPMX), which owns airline stocks. "Everyone has grown to accept it," he says. After this last incident, "there may be a short-term blip," Hodges says. But, assuming no further incidents occur, "everything will be back to normal in a few weeks."

Other issues could have a far more significant effect on airline bottom lines. According to Cordle's estimates, airlines squeezed about $19 billion in annual concessions from labor unions earlier this decade. Now many of those contracts are up for negotiation in 2010, including those at United, American Airlines, Continental Airlines (CAL), and US Airways (LCC). And many groups of workers are expected to demand large raises. Labor and fuel bills combined make up more than half of airlines' annual costs. That means airlines also watch energy markets carefully. Last year's spike in oil prices cost many airlines dearly.

Airlines should also worry about higher taxes or more onerous government regulations, says Morningstar (MORN) analyst Basili Alukos. By itself, a spike in fuel prices, labor costs, or taxes could dash an airline's dreams of 2010 profitability.

Luckily, there are a few positive trends for this industry. Airlines have slashed the number of flights, ending cutthroat price competition on many routes. "The airlines have done such a good job reducing capacity," Alukos says. "That's kept pricing higher." Airlines have also found new ways to wring revenue from customers, from baggage fees to charging for food, drinks, onboard movies, and in-flight Internet. "The airlines have added a tremendous amount of new revenue sources that weren't there a few years ago," Hodges says.

Recovery Hopes

The prospect of a better economic environment in 2010 and 2011 means airlines could reap significant financial benefits from higher ticket prices and new passenger fees. "When the economy [improves] I think the airlines are going to thrive," says Hodges, whose funds own shares of Continental, Delta, and Southwest. Yet others warn that the U.S. airline business remains highly unpredictable, historically a graveyard for capital. Serious long-term challenges mean that airline stocks are popular trading vehicles, but rarely buy-and-hold investments. "They're not fit for long-term investment," says Cordle.

It's difficult, if not impossible, to predict the direction of energy markets, the economy's pace, future terror threats, or the outcome of labor negotiations. As a horrible year for the industry ends and hopes rise for 2010, airline executives must try to do all four at once.

Steverman is a reporter for BusinessWeek's Investing channel.

Business Exchange

Track and share business topics across the Web.