Airline Revenues Are Soaring. Their Profits Are Not | Planes And Trains Expert Jay Shabat on Depressed Railroad Volumes And Global Air Traffic
Jul 11, 2024
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Planes and trains expert Jay Shabat discusses the decline in railroad volumes, impact of service-based economy, and profitability factors. He also explores challenges in the aviation market, effects of strong US dollar on airlines, Alaska Airlines' success story, and sale leaseback model in the industry.
Rail freight demand growth influenced by economic factors like coal decline and housing market challenges.
Major North American railroads maintain high profitability despite modest volume growth.
Railroads navigate challenges in consumer-oriented segment amidst trucking overcapacity.
Airlines manage debt post-pandemic, leveraging assets like aircraft and loyalty programs for financial stability.
Deep dives
Railroad Freight Demand and Economic Reflection
The discussion delves into the demand for freight railroads, primarily focusing on the mixed nature of demand trends. While freight demand has grown by about 2%, it is noted that this growth is from a comparably low base in 2023. The conversation emphasizes the nuanced relationship between rail freight demand and the broader US economy, highlighting how factors like the decline in coal transportation, softness in manufacturing output, and challenges in the housing market have impacted rail traffic volumes.
Profitability and Pricing Power of Rail Companies
The conversation shifts to the profitability of major railroads in North America, outlining how despite modest growth in rail volumes, the industry remains highly profitable. The big six railroads are discussed, emphasizing their operational margins, pricing power across different commodities like chemicals and intermodal containers, and the impact of factors such as housing market activity on rail traffic. The structural nature of the industry and historical context are also touched upon.
Challenges in Domestic Intermodal Market
The focus turns towards the domestic intermodal market within the rail industry, pointing out the challenges faced by railroads, particularly in the consumer-oriented segment. Issues such as overcapacity in trucking, impacts on pricing competitiveness, and strategies employed by railroads to mitigate these challenges are explored. The discussion highlights the influence of fuel prices, capacity cuts, and the significance of strategic growth decisions in navigating the market dynamics.
Airlines' Response to Economic Disruptions and Fuel Hedging Strategies
The discussion transitions to the airline industry, detailing the sector's response to economic disruptions caused by the pandemic. The conversation underscores how airlines had to manage unprecedented losses by issuing debt and securing government loans. Moreover, the analysis extends to airline debt management approaches post-pandemic, including paying down debts and leveraging assets like aircraft and loyalty programs as collateral. The dialogue also delves into the complexities of fuel hedging, contrasting strategies among airlines and the varying impacts of fuel price fluctuations.
Impact of Government Support and Refinery Ownership on Airlines
The impact of government support during the pandemic on airlines is highlighted, emphasizing the critical role it played in averting industry collapse. The discussion further examines Delta Airlines' ownership of an oil refinery and its significance in managing fuel costs. Insights into airline finance management, balancing debt obligations, leveraging assets for liquidity, and the strategic value of loyalty programs are detailed within the context of the aviation industry's recovery and financial resilience.
Aircraft Financing and Collateral Assets
The dialogue expands on aircraft financing strategies employed by airlines, elucidating the role of assets and collateral in securing financial stability. The discussion underscores the importance of aircraft and loyalty programs as valuable collateral assets for airlines, enabling liquidity and financial flexibility. Insights into leveraging sale leaseback transactions, frequent flyer programs, and strategic asset management practices within the aviation sector are examined to navigate financial challenges and enhance operational resilience.
Delta's Debt Management and Share Buybacks
Delta has significantly reduced its long-term debt from $34 billion to less than $20 billion, indicating a focus on debt repayment and decreasing interest expenses. The decision to prioritize debt reduction over share buybacks has been influenced by controversies surrounding the impact of buybacks on companies' readiness for unforeseen crises like COVID-19. While the potential for future share buybacks exists after paying down debt, Delta's current priority remains on improving its financial position through debt reduction.
Global Airline Industry Trends and Southwest Airlines' Strategy
The global airline industry has seen a post-COVID recovery, with premium demand showing strength, especially from small and medium enterprises engaged in business travel. Contrary to other airlines offering premium services, Southwest Airlines has historically adhered to a simple one-class model without premium seating. This strategy has limited its ability to capitalize on the recent surge in premium demand. Elliott Management's scrutiny of Southwest's financial performance and suggestions to introduce premium seats highlight the ongoing industry dynamics and competitive pressures.
Jay Shabat’s Railroad Weekly https://railroadweekly.substack.com/
Follow Jack Farley on Twitter https://twitter.com/JackFarley96
Follow Forward Guidance on Twitter https://twitter.com/ForwardGuidance
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Timestamps:
(00:00) Introduction
(01:10) Railroads
(19:50) VanEck Ad
(20:30) Airlines
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Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.
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