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With seats full, fuel savings won’t reduce airfares

Investors expected to gain from windfall before passengers

The Columbian
Published: January 16, 2015, 4:00pm

DALLAS — Airline investors are poised to reap big benefits from falling fuel bills. Consumers, not so much.

Airlines will probably use the windfall to reward shareholders first while demand for travel remains high and planes are flying with record numbers of seats sold.

There’s “no reason” to trim prices in that environment, said Fred Lowrance, an Avondale Partners analyst in Nashville, Tenn.

Domestic travelers are confronting fares that, at the end of the second quarter, were the highest they’d been in 11 years according to the U.S. Bureau of Transportation Statistics. Airline profits meanwhile are forecast to have risen 65 percent in the fourth quarter to $2.72 billion, according to analyst estimates.

“With all the money flowing in the door with lower jet- fuel prices, how much of that are these airlines going to hang onto?” Lowrance asked. Wall Street wants “to hear a commitment from the airlines that the cash flow is going to be put toward shareholder-friendly things.”

Executives may start laying out what they’ll do with the cash Tuesday, when Delta Air Lines Inc. leads off quarterly earnings reports.

Airlines may use the fuel windfall to expand or add to share buyback programs or accelerate debt payments, said analysts including Joe Denardi, at Stifel Financial and Andrew Davis at T. Rowe Price Group, both in Baltimore. And Delta, American Airlines Group and Southwest Airlines each will boost quarterly dividends this year, according to data compiled by Bloomberg.

None of the airlines would comment ahead of upcoming earnings releases.

Delta said in its Dec. 11 investor day it will return at least $1.5 billion in 2015 to shareholders. In April, the board will consider renewing its dividend and share buybacks, the company said.

Fuel has been the largest expense for airlines, accounting for as much as one-third of total operating costs. The six largest U.S. carriers spent $32 billion on fuel during the first nine months of 2014, according to data from the companies.

Even with jet kerosene down 50 percent since the end of 2013, strong travel demand means fares aren’t likely to drop significantly, according to a Bloomberg survey of six analysts. Wolfe Research’s Hunter Keay projects that fuel staying at less than $2 a gallon would save U.S. carriers $14 billion this year.

“Fares are never a cost pass-through,” said Savanthi Syth, a Raymond James Financial Inc. analyst in St. Petersburg, Fla. “… At the end of the day, demand will dictate what pricing does.”

“For the longest time, these guys lost a lot of money and now, through consolidation and pricing and capacity discipline, they are starting to make a lot of money,” Avondale’s Lowrance said. “I think they prefer making money. These are for-profit companies.”

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