This Thursday is Thanksgiving, so I, like many, many others, will be traveling this week to spend the holiday with family. As much as I am looking forward to that in some ways, I am not expecting the travel part of the experience to be anything other than a nightmare. Crowded airports with long lines to check bags and clear security, packed planes, delays, and a whole host of other misery-inducing things that are the norm for travel in a holiday week are to be expected. The problem, though, is that they are increasingly becoming the norm every week. As a result, passengers’ expectations for the experience of flying have fallen considerably, and investors should be aware that that favors some airlines over others.
The so-called “no frills” carriers have gained in popularity over the last twenty years or so, offering fares that include your seat and little or nothing more. You pay extra to check a bag, to book a seat with enough room for both of your legs if you happen to be over five feet tall, or to do almost anything else that, prior to the turn of the century, passengers took for granted. That, we were told as the no-frills carriers emerged, would be just an option for those that put price before service, and would lead to lower fares for all.
That has worked out in some respects. The deregulation that sparked the rise of the budget airline has indeed increased competition, and that has led to fares that have increased at a significantly lower pace than inflation. Since the year 2000, airfares have increased at a rate of 0.77% a year, as opposed to an average overall inflation rate during the same period of 2.52%. The compounding effect of a difference like that is substantial, so a $100 airfare in 2000 would now cost $118.47, whereas inflation has been such that the overall buying power of $100 in the same year is now $173.06, according to in2013dollars.com.
Over the last year, though, it seems that the airlines are trying to close that gap. The Bureau of Labor Statistics (BLS) data indicate that for two consecutive months now, airfares have risen by 42.9% as compared to the same month last year, around five times the inflation rate. Obviously, that was off of a pandemic impacted low, but the overall drop in 2020/2021 was only around 20%, so fares are now higher than before the shutdown.
The problem, for travelers at least, is that service from all carriers has stayed at the “cut-price” level, or even deteriorated as prices have soared. For the airlines, though, and particularly the budget airlines who are used to operating with low margins, that is not a problem at all. They will be operating as normal, just making more money.
I am not generally a fan of airlines. There have quite simply been too many occasions in the past when they have made shareholders and taxpayers pay for problems they have created. They have spent like drunken sailors when times were good, with massive increases in executive pay and bonuses in many cases, then declared bankruptcy or begged for taxpayers’ money when things got tough. That, though, generally applies to the big carriers. The smaller, budget airlines have, by necessity, been more frugal, and they are the ones that I trust to really benefit, and pass that benefit to shareholders as prices soar.
In a week where travel will be on a lot of people’s minds, it should definitely be on the minds of investors. It has become almost a cliché that U.S. consumers are spending on experiences rather than things, so a busy holiday season for airlines is definitely on the cards. However, with prices soaring and low expectations as to what the cost of an airfare includes, the biggest beneficiaries of that will be budget airlines, so investors should be concentrating on companies like Spirit (SAVE) and Frontier (ULCC)* to make the most of current trends.
*The author currently owns ULCC
In addition to contributing here, Martin Tillier works as Head of Research at the crypto platform SmartFI.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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