Some airline stocks trade above the middle of their 52-week ranges. JetBlue’s shares hit a 52-week high last week. What was once considered a stock trader’s graveyard has become a sector of promising investment.
American’s most recent quarterly report showed that GAAP net profit reached an all-time high at $1.8 billion, up 97% compared to the same quarter a year ago. JetBlue recorded pretax income of $250 million in the second quarter, compared to pretax income excluding special items of $103 million in the second quarter of 2014. Full costs at American dropped 25%. Both sets of numbers were similar to those of the balance of the industry. Passenger traffic rose, fuel costs fell.
The primary reason for cut-rate fares, at least in the past, is to raise market share on competitive routes. The may be easier to do financially when carriers post extremely strong results. On the other hand, it is hard to imagine that carriers can make money on such low ticket prices, so perhaps they are loss leaders. Lose money on every ticket and make it up on volume?
Or, low ticket prices may be a way to increase loyalty among some passengers. A flyer buys a ticket, has a good experience and joins a frequent flyer program. A person who has been an occasional customer becomes a better one. Only each airline can do the exact math. If the formula does not work most of the time, it probably spells financial trouble.
Ticket fares below $100 on some routes are good for travelers, but perhaps not the carriers.
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