In our view, higher fuel cost inputs are forcing more rationality within the hypercompetitive U.S. airline industry. Instead of flooding markets with capacity and engaging in the destructive price wars that plagued airlines in the past, carriers are cutting back on unprofitable routes, and have pricing power for the first time in memory. With pricing power as a tailwind, major airlines can increase free cash flow, enabling them to deleverage their balance sheets and focus on improving returns on invested capital— also< for the first time in memory. The result should be a positive revaluation of the leading industry participants.
The changing dynamics within the industry have largely gone unrewarded by the market. In our view, this has created a substantial opportunity.
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