Airlines: 'The optics around hidden fees is pretty intense,' analyst says

Citi Research Analyst Steve Trent joins Yahoo Finance Live to discuss the White House's proposal to intervene on hidden fees within airfare, the status of the JetBlue-Spirit deal, and picketing airline employees.

Video Transcript

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RACHELL AKUFFO: Well, the White House wants to crack down on some of these exorbitant fees, though, when we're talking about airlines. Now, a new rule proposed by the Department of Transportation could mean more cost transparency when booking flights. Well, Steve Trent, Citi Research Analyst, is here to discuss this and more.

Now, usually more transparency is a good thing. But as you look at how some of the airline stocks are doing today, they don't seem to agree. Obviously, though, part of a broader market sell-off. But what is the initial reaction when you look at what's happening with some of these travel stocks, Steve?

STEVE TRENT: Certainly. Good afternoon, and thank you for having me on. So when we look at what's been happening fundamentally with them, the booking curve still looks pretty healthy, especially in major domestic markets. On the transatlantic, US, South America, we're seeing a rebound. We now also have some tailwind from lower oil prices.

You know, that being said, it's been a tough market to be in risk. So people aren't exactly looking for risk right now, whether that's airlines or crypto. And there's uncertainty stemming, of course, from when the Federal Reserve is going to stop. So I would argue there's some level of dislocation between operational and economic performance of the group and what's happening in equity markets at the moment.

SEANA SMITH: Steve, let's talk about this new rule proposed by the Biden administration because they're pushing for transparency. From an analyst perspective, what does this mean for the carriers? Does this put them at a disadvantage?

STEVE TRENT: I wouldn't necessarily say it disadvantages them. And certainly, the political optics around hidden fees and that sort of thing are pretty intense. But if you look back to 2019, for example, the group made a lot of money on change fees and things of that sort. And a lot of those fees are now gone.

So I think when the consumer is looking at the ticket purchase, if there's greater visibility on what fees they may have to pay, I think that's going to help everybody. And I think on a longer-term basis, at least the network airlines and some of the others here in the United States, are moving to diversify the revenue streams in terms of product as well as passenger flow, which I think is, long term, a smart thing to do.

DAVID BRIGGS: Transparency certainly good for the consumer. The Department of Justice argues that an alliance, however, between JetBlue and American Airlines is bad for the consumer and would cost it $700 million. What does that mean for the Biden administration's approach overall and, in all likelihood, that merger between Spirit and JetBlue down the road?

STEVE TRENT: Yeah, absolutely. So there are a couple of thorny issues there. Certainly looking at the Northeast Alliance, that was originally approved in the waning days of the Trump administration. And then as Biden took over, of course, the Department of Justice launched a lawsuit to try and block it. But even as they telegraph their opposition to it, you know, it is interesting to note that they did not stop the two carriers from the collaboration on the Northeast Alliance itself. They didn't say cease and desist, so they're still undertaking this activity today.

But certainly, when we look at going forward, there's a lot that the government wants to do, I think, to demonstrate that they're protecting the consumer. So if you're looking at the Northeast Alliance, is that necessarily going to bring lower prices? That might be a hard argument. If we think about JetBlue's bid for Spirit Airlines, is that going to lower consumer prices? That might be an even more difficult argument.

So at the end of the day when the dust settles on some of these initiatives in the group, I think it's possible that one or both of these still get done but with significant remedies. But I also think it would be a little hard to believe that both of these entities exist and these proposals exist and they're allowed to go forward without any conditions. I think that's very unlikely to happen.

RACHELL AKUFFO: And, Steve, when you look at additional headwinds, you have things like pilot shortages. You have also picketing going on from some staff at Southwest and United Airlines flight attendants. What is that doing for airline stocks and the confidence in where the market's going from here?

STEVE TRENT: Yeah, great question. I kind of think that's a double-edged sword. So certainly, airlines do not want to have upset customers, and they do not want to have an upset labor force. And there are times they'll have both. And some of that, quite frankly, is not their fault.

So certainly a hurricane forming someplace and hitting a region and creating travel disruption, you can't blame that on a particular company. But certainly the labor thing is a delicate balance. So probably, I think, medium to long term, this means [? exfuel, ?] seat mile costs are going to be higher. And at the same time, there's probably going to be less capacity.

So when one thinks about what's happened with airfares-- and there's been so much focus on airfares being higher than they were in 2019. If one looks at capacity on a per capita basis, there's a dearth of capacity on a per capita basis. And all else equal, sort of just basic supply-demand dynamics, that's something that should support price. So I think as long as we have eventually reached some reasonable equilibrium in what happens with fares vis-a-vis continued good demand and a lack of capacity, on a long-term basis if they can mollify these unions and come to some agreements with their labor, that's potentially good news for unit revenue.

RACHELL AKUFFO: Certainly a tough balancing act, indeed. Steve Trent, thank you for joining us this afternoon.

STEVE TRENT: My pleasure.