Airlines Industry Is Strong Now but on the Brink

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Airlines industry is strong now but on the brink

PFL 7/10/12 (Paragon Financial Limited, MarketWire, “U.S. Airlines Industry Showing Strong Gains Despite Concerns of a Global Economic Slowdown,” Paragon Report, stock research on airlines industries, Sawyer)

NEW YORK, NY--(Marketwire - Jul 10, 2012) - Despite growing concerns of a global economic slowdown the U.S. Airlines Industry has shown investors impressive gains this year. The Guggenheim Airline ETF (FAA) is up nearly 18 percent year-to-date, more than doubling the SPDR S&P 500 ETF (SPY) gain of 8 percent over the same period. The Paragon Report examines investing opportunities in the Airlines Industry and provides equity research on Southwest Airlines Co. (NYSE:LUV) and Spirit Airlines Inc. (NASDAQ:SAVE). Access to the full company reports can be found at: The International Air Transport Association (IATA) last week reported that global airline companies posted a considerableloss in the first quarter of 2012. The IATA reported that 55 airlines across the world collectively posted a net loss of over $1 billion. The results compare with a post-tax profitof $17 million in the first quarter of 2011. The European and Asian airlines suffered the biggest losses, while U.S. airlines posted a strong profit of $518 million after posting a small loss the year prior. "The airline industry is fragile," stated Tony Tyler, IATA's director general and CEO. "Relief in oil prices provides some good news. Unfortunately, the softness in oil markets comes on the back of fears of deterioration in the European economy. Business and consumer confidence are falling. And we are seeing the first signs of that in slowing demand and softer load factors." Paragon Report releases regular market updates on the Airlines Industry so investors can stay ahead of the crowd and make the best investment decisions to maximize their returns. Take a few minutes to register with us free at get exclusive access to our numerous stock reports and industry newsletters. Southwest Airlines recently reported that June 2012 load factor was 84.4 percent, compared to 83.9 percent in June 2011. For June 2012, passenger revenue per ASM (PRASM) is estimated to have increased approximately six percent as compared to June 2011. Shares of the company are up nearly 12 percent in the last three months. Spirit Airlines reported traffic in May 2012 increased 11.4 percent versus May 2011 on a capacity increase of 13.7 percent. The company currently expects capacity to be up 17.0 percent year-over-year for the second quarter 2012, up 23.7 percent year-over-year in the third quarter 2012, and up 22.3 percent year-over-year for the full year 2012. Shares of Spirit Airlines have surged over 40 percent year-to-date.

The plan crushes airline market power

ITF 09 (International Transport Forum, “Competitive Interaction Between Airports, Airlines and High-Speed Rail,” Transport Research Centre, OECD, Round Table 145, pgs. 43-44, Sawyer)

The relationship between airlines and railway services can be competitive as well as complementary. It is likely that high-speed rail (HSR) poses more competition to airlines in short-haul markets (e.g. Amsterdam-Paris; Brussels-Paris) rather than being complementary. As such, an increase in HSR services would reduce the market power of airlines and airports.

Aviation is key to the economy – jobs and manufacturing base

NBAA 09 (National Business Aviation Association, “When Recession Hits, Importance of General Aviation to America Becomes Even More Visible,” March 30, 2009, Sawyer)

The U.S. aviation system is critical to the success, strength and growth of the economy. The system is made up of three segments: Scheduled operations, including passenger airlines; Military, and; General Aviation. General aviation (GA) includes diverse operations, with business uses that range from agriculture, to law enforcement, to fire and rescue services, to varied government, educational, nonprofit and business organizations. 85% of the businesses using a general aviation aircraft for a business purpose are small and mid-sized businesses located across the country. Servicing and supporting these organizations are FBO's, maintenance technicians, suppliers and service providers. General aviation is an essential economic generator directly or indirectly employing over 1.26 million people nationwide according a 2006 economic study by Merge Global. These jobs generate $150 billion in economic activity across the United States, including states like California ($18B), Texas ($11B), Georgia ($9B), and Kansas ($7B). Our industry is continuing to build a strong American manufacturing and employment base that contributes positively to our national balance of trade. Congress recognized just how fundamental general aviation is to our nation's transportation system, rural economies, manufacturing capability, and balance of trade when it passed the General Aviation Revitalization Act a little more than a decade ago. There's no question that in communities across the country, general aviation means millions of jobs: jobs in aircraft manufacture (the U.S. industry leads the world), jobs for people in small towns (where companies use airplanes to reach new markets), and jobs in flight support (including schedulers, dispatchers, maintenance technicians, pilots, training professionals, and airport employees to name just a few examples).

2nc uniqueness

Modernization and growth resolve other uniqueness warrants – prefer predictive evidence

NAW 6/22/12 (National Aerospace Week, “U.S. Aerospace and Defense Industry: Second to None,” Sawyer)

Commercial Aviation  Civil sales: 2011 sales of $49.7 billion. Boeing forecast the need for 33,500 new aircraft over 20 years. • The Next Generation Air Transportation System will replace a 1950s-era radar system and make air travel faster, safer and greener. • A modern air traffic control system would reduce delays by at least 21 percent while providing $22 billion in cumulative benefits to the traveling public, aircraft operators and the FAA. The Joint Economic Committee has estimated that airline delays and congestion in our aging ATC system cost the nation $40 billion a year in lost productivity. • FAA analyses indicate that full implementation of NextGen would reduce aircraft greenhouse gas emissions up to 12 percent by 2025 – the equivalent of taking 2.2 million cars off the road each year.

Operations are improving now

ETN 7/10/12 (EturboNews, Global Travel Industry News, “A4A: US Airlines Deliver Improved On-Time Performance, Baggage Handling,” Sawyer)

WASHINGTON, D.C. - For the eighth consecutive month, U.S. airlines have improved their on-time performance and delivered the best-ever May baggage-handling results, Airlines for America (A4A), the industry trade organization for the leading U.S. airlines, announced today. According to the Department of Transportation (DOT) Air Travel Consumer Report released today, 83.4 percent of flights arrived within 15 minutes of scheduled arrival time in May 2012 – a 6 percentage point improvement from the same month last year. The industry has posted year-over-year gains in on-time arrivals for each of the past eight months. "Our member airlines are systematically improving their operations, focused on what matters most to customers: arriving safely on time and with their bags," said A4A President and CEO Nicholas E. Calio. "Mild weather has helped as have operations that are focused on getting planes that are often full during the busy summer travel season out on time."

2nc link – journey time

Journey-time competitiveness swipes the air carrier market

Rodolico 12 (Jack Rodolico, journalist and radio producer, “Why the U.S. Doesn’t Have High-Speed Rail – Yet,” Latitude News, April 6, 2012, Sawyer)

“The Northeast has densely populated cities, people with wealth, and reasonable distances between cities,” says Jan. He calls it “journey-time competitiveness.” Two hundred to 400 miles is a reasonable distance for high-speed rail to swipe market share away from cheap air carriers. The U.S. cities in the map above fit these criteria. So does much of Europe.

Security and time differentials supercharge the link

JTRC 12 (Joint Transport Research Centre, “The Economic Effects of High Speed Rail Investment,” OECD, International Transport Forum, Discussion Paper No. 2008-16, May 2012, Sawyer)

The net user benefit of deviating a passenger from air to HSR could even be positive in the case of a longer total travel after the shift. This would be the case if the values of time of access egress and waiting time are high enough to compensate the longer `in vehicle time´. The relative advantage of HSR with respect to air transport is significantly affected by the existing differences in the values of time, and these values are no unconnected with the actual experience of waiting, queuing and passing through security control points in airports. The generalized cost of air transport is seriously penalized by security controls at airports, and this translates in more attractiveness of the HSR option. Explaining the causes of the reduction in passengers’ underlying willingness to pay for air travel it is worth looking at the change suffered by the airline product with increased security, the need to arrive earlier to airports. `Consider as an illustration the effect on air travel of required earlier arrival at airports. If passengers must now arrive at their origin airport one and a half hour earlier than previously, then, under plausible assumptions of relevant parameters, travel could decline 7 percent (a plausible range is 3 percent to 11 percent) (Morrison and Winston, 2005).

2nc link – public financing

Regardless of competition, public financing of HSR hurts the industry

Poole 12 (Robert Poole, director of transportation policy and Searle Freedom Trust Transportation Fellow at Reason Foundation, advised the Ronald Reagan, the George H.W. Bush, the Clinton, and the George W. Bush administrations, “Airport Policy and Security Newsletter #79,” Reason Foundation, May 8, 2012, Sawyer)

But let me point out two other issues the airline/airport world ought to keep in mind if faced with competitive threats from HSR. First, if an airline route between City A and City B turns out to be a dud, the airline and airport capital can pretty readily be converted to alternative, potentially more viable uses. By contrast, if an HSR route is developed between those same two points and turns out to have far less ridership than needed to cover its cost, the large majority of the capital costs are “sunk”—and hence wasted. Second, every HSR project being proposed or built today anywhere in the world has all or nearly all of its capital costs being paid for by general taxpayers. At best, the operating and maintenance costs are hoped to be recoverable from passenger fares. This is in stark contrast with air service, for which 100% of the infrastructure costs (airports and air traffic control) are paid for by fees and charges paid by passengers and airlines. (That is not strictly true for the routes to Podunk being subsidized via the Essential Air Services [EAS] program—but even that is being paid for largely by overflight fees paid by international airlines, not by general U.S. taxpayers.) Consequently, the aviation industry would be completely justified in lobbying hard against any and all attempts by federal and state governments to use large sums of general tax money to create competition with self-supporting air service.

2nc link – empirics

Err neg – their evidence is speculative whereas our argument is grounded in empirics

CAPA 11 (CAPA Centre for Aviation, “China’s Aviation Industry to Suffer Billions in Losses from High-Speed Rail,” April 15, 2011, Sawyer)

High-speed rail is rapidly becoming a pillar ofChina's transportation network and an increasing threat to local airlines that have prospered from years of strong demand growth and a lack ofefficientground transport alternatives. China's burgeoning high-speed rail network is already the world's most extensive at 8358 km as at the end of 2010. But that is just the start. A 50% increase in the network is planned in 2011 alone. China’s aviation industry is bracing for a reduction in revenues and profitability arising from rising competition from high-speed rail. International expansion is an increasingly necessary option for China's airlines.

2nc link – perception

Link is perception based – that alone turns the case

Enthoven et al. 11 (Alain C. Enthoven, Professor of Public and Private Management, GSB Stanford, President, Litton Medical Products, Economist, Rand Corporation, William C. Grindley, World Bank, Associate Division Director, SRI International; Founder and CEO, Pacific Strategies, William H. Warren, Director/Officer at IBM, ROLM, Centigram, and Memorex, “The Financial Risks of California’s High-Speed Rail Project,” Community Coalition on High Speed Rail, September 14, 2011, Sawyer)

Also, airlines have more pricing flexibility and ‘sticking power’ than does a single route railroad. If the airlines predict they’ll lose market share, they’ll cut prices between the cities on the train’s routes. This happened to Acela between Boston and Philadelphia when Southwest Airlines entered the market. 122 While Southwest, United, American, Virgin and three other intra-state carriers can compensate by maintaining prices or raising prices in other routes throughout the US, the train’s ticket prices would have to drop to stay competitive. But along with that decrease in fare, revenues will drop and the system then needs an operating subsidy.

2nc impact – economy

The nation’s economy is dependent on aviation output

Campbell-Hill 06 (Campbell-Hill Aviation Group, Aviation and Economic Research Consultants, “Commercial Aviation and the American Economy,” Air Transport Association of America, March 2006, Sawyer)

The U.S. civil aviation sector (including air transportation, related manufacturing and air-based travel and tourism) was collectively responsible for $1.37 trillion of national output in 2004, supporting 12.3 million U.S. employees and $418 billion in personal earnings. Commercial aviation accounts for the majority of this impact with $1.2 trillion in output, $380 billion in earnings and 11.4 million jobs. U.S. Civil Aviation Economic Impact (2004) Commercial Aviation General Aviation Total Output (Billion $) 1,247 118 1,365 Earnings (Billion $) 380 38 418 Employment (000) 11,393 956 12,349 The national economy is highly dependent on commercial aviation, which, in 2004, was directly or indirectly responsible for 5.8 percent of gross output (i.e., economic activity), 5.0 percent of personal earnings and 8.8 percent of national employment.

More evidence – lynchpin of overall gross output

Campbell-Hill 06 (Campbell-Hill Aviation Group, Aviation and Economic Research Consultants, “Commercial Aviation and the American Economy,” Air Transport Association of America, March 2006, Sawyer)

The commercial aviation sector has a significant impact on the U.S. economy, based on air transportation and airport services, manufacturing of air transportation equipment and travel and tourism expenditures by air passengers. Including induced impacts, the U.S. commercial aviation sector drove $1.2 trillion in economic activity (5.8 percent of U.S. total), $380 billion in earnings (5.0 percent) and 11.4 million jobs (8.8 percent). 14 The direct impact of commercial air transportation and related industries was estimated at $247 billion in gross output, $72 billion in earnings and over one million jobs, with commercial air transportation accounting for approximately half of the output impact. Commercial air-traveler expenditures created indirect impacts including $191 billion of gross output, $67 billion of earnings and 3.3 million jobs, mostly for the accommodations and food service sectors.

2nc impact – agriculture

Key to the economy – movement of goods and also key to agricultural competitiveness

AFA 12 (Airlines for America, “Economic Impact,” Sawyer)

In the summer of 2005, Pulitzer Prize winnerDaniel Yerginopined, "Every day, the airline industry propels the economic takeoff of our nation. It is the great enabler, knitting together all corners of the country, facilitating the movement of people and goods that is the backbone of economic growth. It also firmly embeds us in that awesome process of globalization that is defining the 21st century." Indeed, theWorld Bankrecognizes that "Air transport has become an essential economic and social conduit throughout the world. Beyond the benefits of fast and inexpensive transcontinental travel, air transport also has become a vital form of shipping for high-valued items that need to come to market quickly, such as agricultural products subject to spoilage." Further, it notes that air cargo has become the essential mode of transportation for high value and perishable goods, wherein 40 percent of all goods by value worldwide are transported by air: "Many developing countries depend heavily on air cargo for their exports as other modes are unreliable or non-existent." University of North Carolina ProfessorJohn D. Kasarda(Director of the Kenan Institute of Private Enterprise at UNC's Kenan-Flagler Business School) has observed that major airports are essential to U.S. competitiveness and are powerful engines for local economic growth. "Business is a contact sport," Kasarda observes, "and aviation is the physical Internet — it lets people and products physically connect over long distances quickly... It enables the real connectivity. We're talking about what enables the world to be flat." He noted in an October 2008 article that the combined importance of speed, agility and connectivity in today's increasingly fast-paced, globally networked economy are creating a new economic geography "with aviation networks driving and shaping business location and economic development in the 21st century as much as highways did [in] the 20th century, railroads in the 19th, and rivers and seaports in the 18th... The upshot is that route development, business development, and regional economic development go hand-in-hand around the globe." On May 22, 2008, in a speech to the Aero Club of Washington, former U.S. Air Force Secretary Michael Wynne declared that "Our country's vastness and its economy depend upon commercial aviation as the backbone of national and international commerce… Global trade undergirds America’s strength and allows the United States to project its economic power. In my opinion, the commercial aviation industry [is] a crucial component of America’s economic strength. This has been true for decades, and will remain true into the foreseeable future." In August 2008, Moody's Economy.com chief economist Mark Zandi remarked that "Aviation is the glue that keeps the global economy together. Without widely accessible and well-priced air travel, the global economy will quickly become less global."