New Advertisement Law Hits Airlines - Analyst Blog

The airline industry is seemingly ending the year on a discordant note as rising fuel prices and capacity issues linger. To this has added the latest fare advertising regulations as announced by the U.S. Department of Transportation (DOT).

As per the announcement, effective January 24, 2012, carriers would be required to incorporate all government taxes and surcharges while advertising the fees for their respective flights.

For several years, carriers have been attracting customers by creating a mirage of endorsing low fares (minus taxes and other fees) and this continues to be one of the finest advertisement strategies till date. It is estimated that carriers conceal approximately 20% of the additional fare costs while advertising the fares. In recent times, a rapid upsurge has been witnessed in such practices given online promotion on various websites including social networking sites.

However, this does not seem to go down well with various consumer forums and they have allegedly charged airlines for misleading customers. Airlines like Spirit Airlines ( SAVE ) have been recently fined approximately $50,000 on these grounds. Last Monday, transportation department disclosed the carriers' violation of rules for promoting new services in Los Angeles during June this year. The airline endorsed a price of $9.00, manipulating information on additional charges that carried up to $17 for each ticket purchased online. However, the current rule, imposed in 1984 does not stress on the disclosure of taxes and fees, thus allowing carriers to advertise airfares exclusive of such charges.

Top discounted carriers like Southwest Airlines ( LUV ) as well as Spirit have now decided to stand against the new law enforcement citing violation of free speech rights on a commercial platform.

For an industry with market capitalization of approximately $37 billion, the new rule comes as a big blow considering the key role of advertising in attracting customers and expanding in new markets. Apparently, top players like Delta ( DAL ) and United Continental ( UAL ) are also expected to follow suit in confronting the new mandate. On the flip side, the changed regulation can create a positive impact on customer satisfaction for an industry struggling to stabilize its customer services that shrunk while carriers implemented several cost control measures.

Currently, it seems too early to project the magnitude of the impact of the latest advertising law and we believe that the larger picture surrounding this issue is yet to surface.

We maintain our long-term Neutral recommendation on Southwest, Delta and United Continental supported by Zacks #3 (Hold) Rank.

SOUTHWEST AIR ( LUV ): Free Stock Analysis Report

SPIRIT AIRLINES ( SAVE ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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