America's Largest Airlines Unfazed by Interest Rate Turbulence

Between labor strife, oil spikes and weather delays, airline management teams and investors have plenty to worry about. Fortunately, the Federal Reserve's potential rate hike shouldn't cause too much extra turbulence.

Especially after confusingly low job-growth data on Friday likely pushed the increase farther into the future than this month.

Conventional airline-investing wisdom would say that rising rates are bullish for transport companies, since they're typically a sign of a pickup in economic growth and, therefore, increased demand for travel. Rising rates in theory should strengthen the dollar, making overseas purchases of crude oil, a key jet-fuel ingredient, less costly. Since fuel accounts for more than one-third of a typical airline's total expense, any downward influence on oil prices would be a windfall.

In fact, though, most in the industry expect a Fed move to be a non-event for airlines. Robert W. Mann Jr., a former airline executive who's now a Port Washington, N.Y.-based industry analyst, said airlines right now are more worried about "uncontrollables, unhedgeables and unknowables" than they are rates.

Airline officials themselves are quick to caution that this is no normal cycle, warning against banking on significant upside. An argument can be made that rates have been held artificially low for so long that much of the typically associated economic growth is already baked in.

And given how low oil prices have been over the last year, and the geopolitical and supply factors that right now seemingly outweigh a stronger dollar, there's no reason to believe that rates will drastically move the price of jet fuel.

Investors and management seemingly do not have the Fed front of mind. Perhaps tellingly, there was no mention of a potential Fed move or of interest-rate policy in general on any of the first-quarter conference calls of Delta Air Lines (DAL) , American (AAL) or United Continental (UAL) .

The good news may be that there's little reason to believe a Fed action would hurt the carriers. Airlines, of course, are also huge borrowers, but aircraft financing is typically at fixed rates, and most carriers have taken advantage of the extended period of low rates to buy back variable-rate debt.

While future equipment purchases may grow more expensive as rates rise, it would take a number of increases before rates are high enough to really move the needle. And airlines are better positioned now to take on increased payments than ever before: Delta in February earned an investment grade credit rating from Moody's, thanks to its work reducing a $17 billion debt load in 2009 to $6.7 billion at the end of 2015.

Southwest Airlines (LUV) and Alaska Air Group (ALK) also have investment-grade ratings, and though neither American nor United Continental are there yet, their health is strong enough to borrow much more cheaply than they have in years past. In fact American CEO Doug Parker has stressed to investors that he isn't concerned with racing to reach an investment-grade rating, in part because his company can already borrow so cheaply. Presumably 25 basis points from the Fed will not change that.

Similarly, aircraft lessors may feel some pressure to raise their prices should the Fed move, but without a dramatic uptick in borrowing costs, they will likely be reluctant to make any bold moves given the number of competitors. In a low-rate global environment, even if the Fed hikes rates a couple of times, lessors will still likely be able to offer their investors an attractive spread, lessening their need to significantly raise prices for airlines. 

Still, there is no guarantee that rates will change immediately, in light of a Friday jobs report from the Labor Department that showed about 75% less growth in payrolls than analysts expected.

If an airline investor does want to move on the Fed action, it would be best to first try to make a determination as to whether the Fed is ahead of the curve or behind. Is the Fed moving because it sees a strong economy on the horizon? If so, load up on airline shares, even riskier turnaround stories like United Continental.

But if clouds are ahead, move carefully.

See full coverage on the Fed's upcoming interest-rate decisions.

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