There is an assumption that in a free market economy a rising tide raises all boats. That is simply not true. There are winners and losers in all economies.
Take the airline industry for example. This industry has struggled for years. During some of the most impressive growth in the last decade, airlines went broke and struggled to survive.
Then, just when the group had its act together, oil prices were attacked by hedge funds bringing prices to historically high levels. Jet fuel, being the largest cost component of any airline, absolutely crushed margins.
In a scramble to survive, many carriers added surcharges and took other steps to keep margins at a sustainable level. Were the moves enough?
Delta Air Lines, Inc. (DAL) reported results today that missed expectations. The company lost, excluding items, $26 million or $0.07 per share. Analysts were hoping for a break-even quarter.
The good news was that sales increased by 9%. Obviously, DAL benefited from increases in ticket prices and fees, but that was not enough to outpace the huge increase in fuel cost.
In response, DAL has been cutting capacity and expenses in any way possible. Given that oil has now dropped by nearly 50%, these efforts should help DAL in the quarters going forward. Of course, the catch 22 is that just when oil prices fall to levels that allow for profitable operations, the economy slows to a halt.
Investors have been selling shares of DAL in response to oil’s fluctuations. The airline sector has been a big loser this year, and DAL has not been immune. Shares of DAL are down some 50% since the beginning of the year. (See also: "Bargain Hunters Descend on Airline Stocks.")
They were down much more when oil was at a peak. DAL fell to a low of $4.00 before turning a tad higher with oil prices retreating. Before the report shares had settled in at about just over $7.
With oil prices down more than $3 today, DAL is actually trading higher today despite the earnings miss. Investors clearly believe that the savings in oil prices will offset weakness in the economy.
The key for the future will be capacity. If the economy does recede for several quarters, airlines can hardly afford to fly half-empty planes. Fortunately, it is much easier for DAL to reduce capacity given less restrictive labor agreements.
If you follow the charts, you will see DAL setting up for a nice reverse head and shoulders. That suggests that DAL will increase in value from current levels. With oil prices dropping like a rock such discounts will flow directly to DAL’s bottom line.
That will support higher prices. Whether it lasts or not will be dependent on DAL management and their ability to keep planes full during a difficult economic slowdown. I’m hopeful they are taking proper steps for that future.
This article was written by Jamie Dlugosch, editor, InvestorPlace.com. For more actionable insights likes this, visit www.InvestorPlace.com.
