Shares of United Airlines (UAL) are up 20% in the last 5 days. If this comes as a surprise to you imagine how it felt to the legions of dedicated short-sellers who've been betting against the airline industry in general and United in particular over the last few years.
No industry captures the mood of this bull market like airlines. No group is more levered to the economy or more hated by consumers. But the dynamic has changed since 2008 when the industry lost $5.6 billion in the US and every day was a good day to sell the stocks. This year US airlines will make more than $10 billion. They're doing it the old fashioned way: by mergers, surcharges and convenience fees.
The number of carriers accounting for 90% of the US market is down from 11 to 5 since 2007. Available seat miles have fallen from 744 billion in 2007 to under 700 billion today. The average round trip fare has gone up by 17% despite jet fuel prices doing very little. This year the industry will make more than $6 billion in baggage checking revenue. Basically everything you hate about travel is good for the industry's bottom line.
If you're looking to call a top in the stocks or even just hoping for some relief on your next trip wait until you see what Airbus has planned. Yesterday Airbus announced that it had found a way to add more seats to a next generation version of its popular A330 wide-body jet. Remember Airbus’ customers are the airlines, not the passengers. While fliers are crying for more comfortable seats and additional amenities the airlines just want lower costs and more capacity. To meet those demands and extend the life of its 20-year old A330’s Airbus is improving the jets and installing smaller seats. That means more tickets sold for every flight.
While shrinking the chairs is a start, Airbus has even more radical plans for increasing revenue in the next generation of planes. The company has filed a patent for seats that stretch the definition of what sitting even means. The new plan is to minimize the size of each row by having passengers lean back into cushions that resemble bike seats and strap themselves into place with seat belts. With the entire row of seats will be fixed to a common bar, allowing it be folded and stored when not in use. No seat back, no tray table and no legroom at all. Just a plane full of passengers trapped in a semi-squatting position for however long the journey may take.
Airbus acknowledges that passenger comfort is an afterthought but says it’s an acceptable tradeoff. “Reduced comfort remains tolerable for the passengers in as much as the flight lasts only one or a few hours,” the patent states.
None of this was a secret. Look at the ads. 40 years ago when the 747 was released American Airlines (AAL) used the extra space to create not one but two swinging lounges in the sky. Five years ago the Dreamliner promised less space but groovy colors and lights for comfort. Now Airbus is selling the idea of a slave galley, park bench, torture chamber model where passengers who don't row presumably get stuffed out the window. It's lousy customer service but the margins are to die for.
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