Why Airlines Will Find More Upside Than Downside in the FAA Reauthorization Bill

Anyone with more than a few years of air travel under their belt already knows that the coach-class experience has gotten less and less pleasant over time. The Federal Aviation Administration might not have stemmed that tide much, but in its latest reauthorization, it will be given some more leeway to help on at least one front.

In this segment from MarketFoolery, host Mac Greer and senior analyst Matt Argersinger weigh the changes that the bill makes, and one in particular that travelers should appreciate: The agency will be allowed to set minimum dimensions for seats. (Does this mean we might get back some of our lost legroom? Stay tuned.) But language previously in the bill that might have limited the excessive growth of add-on fees has been scrapped from the final version. That's good news for airlines' bottom lines, and in that context, Argersinger shares his favorite airline stock today.

A full transcript follows the video.

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This video was recorded on Sept. 24, 2018.

Mac Greer: Matt, let's close with the sexy world of FAA reauthorization legislation. I want to talk airlines because we had a bill this Saturday to reauthorize the FAA. A few interesting things here. Now, the bill is going to require the FAA to set minimum dimensions for seats. For me, most interestingly, leg room. The leg room is just getting ridiculous on airlines.

Matt Argersinger: It is. It'll be interesting to see what they determine a standard human is. What are the dimensions? I haven't read the report. Hopefully it's relatively comfortable for someone as big as ... what are you?

Greer: 6'1-ish. Shrinking. [laughs]

Argersinger: [laughs] I feel like it's just gotten really tight.

Greer: So that's good. They're going to have minimum width and leg room. All that good stuff.

Argersinger: That's a win.

Greer: There are going to be other passenger protections, which is a win. But one thing that's really making news is that there was language in the legislation to mandate "reasonable and proportional baggage and change fees." That language has now been removed. You're a guy who follows the airlines. You follow airline stocks. There's going to be nothing in this bill holding the airlines back from just charging fees on baggage and charging all these additional fees. Is that a good thing? A bad thing? What is that?

Argersinger: Obviously, if you're an airline executive, this is great news. Certainly, over the last decade, you and I have seen it, we travel, the proliferation of fees for all kinds of things, but certainly for baggage fees. Baggage fees have become a staple, table stakes for traveling. You know they're coming. The fact that airlines have been free to set their own rates, and I know a bunch of them just recently raised their baggage fees, the idea that Congress was going to try to control that, and hurt airlines' pricing power, it was troubling. As a free market guy, I don't want that. Now, as a passenger, I'm saying, "Well, I don't want to pay more fees." But I certainly understand, an airline's ability to charge what they want to charge for what they think the service is worth, and it's my choice as a consumer to pay it or not. I'm glad the government's not messing with that. As a shareholder of Delta, for example, I'm glad that they can set their own rates and compete with other airlines on those fees.

Now, I will point out that revenue from baggage and reservation fees for the airline industry as a whole was $7.5 billion dollars in 2017. That's a big number. The idea that growth of that number or the amount of that number could be regulated was troubling. It's a big piece of airline revenue now. So, I'm glad that's out of the hands of the government. As a shareholder, if you're interested in airlines, that's certainly good news.

Greer: And in terms of airlines, I know in the past, Delta has been one of your favorites. Do you have a favorite airline stock right now?

Argersinger: It's still Delta for a lot of reasons. Competitively, from a margin standpoint, they seem like a great operator. They have the best investment-grade balance sheet of all the airlines. But it's just as cheap as all the other airline stocks. I feel it's a jewel, even compared to Southwest, which I know a lot of investors tend to favor. Delta seems like the better operator and it's a much cheaper stock.

Mac Greer has no position in any of the stocks mentioned. Matthew Argersinger owns shares of DAL and has the following options: short October 2018 $55 puts on DAL. The Motley Fool recommends LUV. The Motley Fool has a disclosure policy.