Talking Numbers

Top analyst: Why higher airfares are here to stay

Top analyst: Why higher airfares are here to stay

Maybe all those high airline fees are starting to pay off – at least for shareholders.

The index tracking the airline industry – the XAL – is at its highest level in 12 years. And it could go higher if one top analyst is correct.

Helane Becker, senior airlines research analyst and managing direct at Cowen and Company, is predicting that net income for the overall industry will grow an incredible 37.5 percent this current quarter. The last time this happened was in the 1980s. And while the XAL is up 24 percent year-to-date, she believes the sector is generally a buy.

"Nobody's really made a lot of money over the years investing in airlines until the past three years," said Becker in an interview with "Talking Numbers." But that is changing, she said, because of ancillary fees, the lack of capacity growthand the lack of pilots.

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"The airlines are doing everything they can to mitigate the shortage of pilots, and that will correct itself in a couple of years," Becker said. "Between now and then, there's physically no place to put aircrafts at the busiest airports, at least in this country. The result is that airfares are going up. Also, departures per airport are going down, and seats per departure are going up. All of that is having a positive effect on airfares and on bottom line earnings."

Becker also sees higher prices ahead even as airlines switch out smaller planes uses in shorter flights for slightly larger ones.

"Some of the 50-seat jets that you're riding on that are so uncomfortable, and so undesirable, and so expensive to operate – those are going away," Becker said. "They're being replaced by 76-seaters and 100-seat aircrafts."

New planes won't mean lower fees at the counter, however. "Airfares are going up," Becker said. "Costs are going up, pilot salaries are going up, [and] flight attendant pay is going up. We're seeing an increase in fees – landing fees at airports, [and] jet fuel costs in general are rising. With costs going up, revenue has to go up, and that's why airfares are going up."

But those fees are more than getting passed on to the consumer. Airlines are also adding a little bit more for their bottom line, according to Becker.

"In the second quarter, for the airlines that have reported so far, it looks like we've got about an 8 percent increase in revenue and about a 3 percent increase in cost," she said. "So we've have a 5 percentage point increase in margin."

The industry is seeing low double-digit margins in general, with some airlines doing even better than that. With "Alaska Air, you've got an 18 percent operating margin; [with] Southwest, you've got a 15 percent operating margin."

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In fact, Southwest Airlines is Becker's top pick for 2014. Besides higher fees, she also sees other ways the company will drive up revenue.

"There are dates upon which Southwest is making adjustments to their route network and their schedule that will, over the next four to five years, drive about $2.5 billion in revenue opportunity. And we think that over that timeframe, earnings will double. If earnings double, we think the stock price can double."

To see the full interview with Helane Becker on what's next for airlines, watch the above video.

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