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Show s AIRLINES LESS TURBULENCE AHEAD Despite a flood of red ink in 1982 and early in 1983, airline stocks were one of the best performing groups in the market since last August. Enthusiasm was generated by expectations of improved im-proved earnings as the economy began to recover, aided by better control over labor costs and lower fuel prices. Subsequently the airlines gained more support due to reductions in deep discounting dis-counting of air fares. More recently profit-taking has cut into the group's market performance. FUEL A MAJOR SWING FACTOR Fuel for the industry is a major cost factor; each 1 cent swing in fuel prices means about $100 million for the industry in-dustry as a whole, and the decline in fuel prices in 1982 resulted in a reduction reduc-tion in costs of some $600 million not exactly small change. For 1983, unless U. S. or World economies show a much stronger degree of recovery than we currently anticipate, we believe the odds for stable or declining fuel prices for the airline industry are about equal; and the possibility that fuel prices will again increase are quite slim, barring war, of course. DEREGULATION SPAWNED FARE WARS To the less efficient or more complacent compla-cent carriers, deregulation has been a nightmare breeding a host of new competitors com-petitors offering more frequent or more convenient service and diverting traffic from established carriers by slashing prices. In mid-March, in a bid to return both itself and the domestic airline industry in-dustry to sustained profitable operation, opera-tion, American Airlines announced major changes in its fare. The new fare structure basically replaced thousands of different, mainly discounted, dis-counted, fares with four basic mileage-based mileage-based fares. American's new and much simplified fare plan was generally greeted with enthusiasm not unmixed with skepticism by most airlines, and the general mood seemed to be, "We'll eagerly match their fares in any market where they operate." The warm industry welcome basically stemmed from the fact that most major airlines have been reporting repor-ting red ink for some time andt American's new fare structure would generally increase the yield or revenue produced per passenger-mile flown. PAN AM MARCHES TO A DIFFERENT BEAT It wasn't long before Pan Am introduced in-troduced a discordant note into the more optimistic airlines passenger market, however, by cutting some fares on its domestic routes up to half those proposed under American's new plan to limit discounts and raise prices. Pan Am was careful, however, to emphasize that its new fares were designed only to funnel more domestic passengers into its vital (some 7 percent per-cent of its volume) foreign flight connections con-nections rather than to undermine new industry price schedules. Nevertheless, major competitors generally indicated they would reluctantly reluc-tantly match Pan Am where they had to, meaning for example that they would not lower fares on a popular departure time unless Pan Am's flight was roughly head-to-head with theirs. OUTLOOK RELATIVELY FAVORABLE It will probably be some time into the peak springsummer vacation season before we have hard evidence as to whether the new American fare structure will be only partially or totally total-ly offer by Pan Am or other carriers. Nevertheless, the economic recovery in the U. S. which should gradually spread abroad is the most positive element in the outlook for the airlines in 1983. As a matter of fact, early second-quarter airline reports indicated that a larger-than-expected upsurge in travel was already occurring. Upward progress in the economy should reduce the need for deep discounting dis-counting of air fares and increase the chances that major elements of the American-inspired "simplified" fare structure will last. Overall, despite a number of uncertainties, we believe the balance of factors moderately favor further but quite volatile upward progress for the industry this year. |
