New Airline Security Rules: Govt or Industry to Pay? (DAL, LCC, AMR, UAL, LUV, JBLU, FDX, UPS)

The airline industry has recovered solidly from a string of losing quarters, but it now faces another issue brought on by the discovery last week of an explosive device in an air-cargo shipment originating in Yemen. Delta Air Lines, Inc. (NYSE: DAL), US Airways Group, Inc. (NYSE: LCC), AMR Corp. (NYSE: AMR), United Continental Holdings (NYSE: UAL), Southwest Airlines Co. (NYSE: LUV), and JetBlue Airways Corp. (NASDAQ: JBLU) all reported positive earnings for the third quarter and were looking for a robust holiday travel season.  That may still materialize, but new measures to combat the threat posed by explosives in air-cargo shipments could be costly. The International Air Transport Association, IATA, wants to spread the cost of new security procedures around, reducing the impact on the nascent recovery in air travel and transport.

According to the IATA’s Director General, the world’s airlines will spend $5.9 billion on security in 2011, more than their projected profits.  The IATA has recommended a five-pronged approach to improving air-cargo security, including a supply chain solution that begins with the manufacturer and ends at the cargo screening device at the airport, rather than relying solely on the screener.

Systems tracking the data for the cargo would need to be developed and installed. Putting the burden on the airlines to implement and pay for this would definitely have an impact on profits and, of course, ticket and freight prices.

Air freight shipments have fallen by 6% since May 2010, and the year-over-year increase in September was 14.8%, substantially below the 19% year-over-year gain in August. Passenger traffic continues to increase, with passenger demand in North America up 11.1% year-over-year in September.

Both passenger and freight traffic have now returned to pre-recession levels, and the IATA — and the airlines — want to move on from there. But they fear that piecemeal solutions, especially uncoordinated restrictions on package shipments, will be unnecessarily costly to the industry. Following the discovery of the bombs, Germany and Britain have restricted package deliveries from Yemen, and Britain prohibits delivery of some printer cartridges. The US has temporarily halted all cargo shipments coming from Yemen.

A law requiring that all cargo going on-board a passenger flight be scanned may be extended to requiring a scan of all cargo-flight freight as well. The expense of that would fall most heavily on freight carriers such as FedEx Corp. (NYSE: FDX) and United Parcel Service, Inc. (NYSE: UPS).

The IATA says that air freight delivers some 35% of the total value of goods traded internationally, about 26 million tons in 2009. By 2014 the total tonnage is expected to reach 38 million tons. The carriers want the business and they want to do it safely, but they also believe that the security costs should be shared.

Paul Ausick