Top airline stocks Delta (NYSE:DAL), American (NYSE:AMR), United Continental (NYSE:UAL), Southwest (NYSE:LUV) and US Airways (NYSE:LCC) have always had a give-and-take with regulators. Airlines and the feds have struggled to craft the right balance between safety and cost to both airline stocks and airline passengers.
Put another way: Err too much on the safety side, costs are too burdensome for airline stocks and plane manufacturers to bear; err too much on the cost side, people die.
That match is playing out this week as air safety advocates square off against the commercial airline industry over rules to reduce pilot fatigue and mandate better training. The outcome will impact the entire sector, including the major airline stocks Delta, American and United Continental; so-called low-cost carriers like Southwest and JetBlue (NYSE:JBLU) and even parcel delivery giants UPS (NYSE:UPS) and FedEx (NYSE:FDX).
Congress approved new pilot safety rules last year in response to a 2009 crash of Colgan Air Flight 3407 that killed all 49 passengers and one person on the ground. The crash investigation faulted both pilots for flying while fatigued and not having received sufficient training. The rules would establish new pilot testing requirements, extend the rest and off-duty periods prior to duty and set weekly and monthly limits on fight duty time.
Colgan Air, a Pinnacle Airlines (NASDAQ:PNCL) subsidiary, has received a lot of attention from the FAA of late. On Sept. 7, another Colgan Air flight landed at the wrong airport in Louisiana because the pilots turned off the autopilot on a clear night and subsequently got lost. Oops.
Congress told the FAA to implement the new rules by August. But so far, the rules are in limbo as airline lobbyists flex their political muscle. The airline industry had derided the new rules as job killers, noting that the cost of implementing the fatigue rule alone approaches $20 billion over 10 years. FAA estimates the cost at only $1.25 billion. That’s quite a range.
But you can bet after the political wrangling is done, some form of new regulation will hit the airline sector hard. With all of the advanced avionics and auto-functions commercial airplanes have these days, pilots are relying on computers to fly planes rather than actually flying the plane themselves, a draft study commissioned by Congress found. The report said more than 60% of accidents and 30% of major incidents involved pilots who couldn’t properly fly the plane manually or made mistakes with the automated flight controls.
The matter of balancing safety improvements versus the cost of human lives lost is a grisly business (a human life is worth $6 million today, up from $2.6 million in 1994). It’s also a tough row to hoe for the FAA, which is charged with both ensuring air safety and promoting the health of the airline industry.
For investors who can take the human element out of the equation, expensive new regulations will always weigh on earnings. And for an industry with margins that more closely resemble a public charity than a business, the financial impact will be significant. Then again, as an airline passenger, you’d probably rather fly with a well-trained, well-rested pilot.
And in the end, that probably shakes out in the form of higher fares and fees to cover the added cost of safer flying.
As of this writing, Susan Aluise did not own a position in any of the stocks named here.