Why Bother With Airline Stocks

By: Tim Thursday, January 22, 2009 9:36 AM

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(By Tim - iStockAnalyst Writer)

I have long had an interest in airline stocks, but only the type of interest that one has in news of catastrophes and car wrecks. My first "job" was as an Air Force pilot and I have many friends who went into the airlines after leaving the Air Force. For as long as I have been watching the companies and stocks they have been especially consistent in their inability to string together any series of quarterly or annual profits. With the year end earnings reports on these stocks coming out, my ghoulish side is watching with wonder on how the management of these companies continue to screw up.

United Airlines (NASD:UAUA) lost $1.3 billion in the 4th quarter. $936 million of the loss was a write off of hedges against $200 oil. Fuel is an airlines 2nd biggest expense, oil falls from $120 to $40 and a major airline loses a billion dollars!

American Airlines (NYSE:AMR) lost $340 million in the 4th quarter and $2 billion for all of 2008. AMR had been profitable for the previous two years earning...oh...$735 million combined in 2006 and 2007. And in 2005 the company lost over $800 million.

Even consistently profitable Southwest Airlines (NYSE:LUV) hit a foul ball in its 4th quarter, taking a $247 million write down on fuel hedges and losing $121 million for the year.

So the airlines screwed 2008 by not accounting for increasing fuel costs in the first half of the year and over-hedging against high fuel costs during the 2nd half. For 2009 they are now predicting significant drops in revenue as the economic slowdown deepens.

Airlines have been their own worst enemy. First they trained their customers to look for the lowest possible fares. Since they are filling their planes with low fare passengers they cut services like meals and beverages. They charge for baggage. The minority of passengers who pay full fares that the airlines depend on are disenchanted along with the cheapos. We are all cheapo airline customers because the airlines trained and allowed us to be that way.

An airline is a business with a huge overhead. Salaries for pilots, mechanics, flight attendants, support personnel and management. Fuel costs in the hundreds of millions of dollars and $50 million dollar aircraft that have lease or loan payments. Then they have customers who expect to be able to fly from LA to NY for $300. If your airline does not sell the seat for that price the competitor will. Finally, if the airlines manage to hold their prices to a profitable level, a new start up will come into the picture and undercut them on their most profitable routes. As an investment, airlines make no sense to me, but I sure like to read the press releases.

If you still think you have to own an airline stock, take a look at Copa Holdings (NYSE:CPA). This Panama based airline serving Latin America and major U.S. cities is consistently profitable. Copa has a consistent, easy to understand fare structure (if you can believe it!), excellent service and a rapidly growing market. Net profit margins have been 15% of revenues, for an airline!

In the current U.S. airline company environment it is my opinion that the stocks of these companies are much more entertaining to watch than to own. I am looking forward to seeing the results on the most recent quarter for the new Delta-Northwest.

Airlines stock chart

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1/22/2009 10:02:40 AM Retired by Bob Ross The whole purpose of airline regulation from the beginning was two fold. First establish route structures for airlines. This would create stability to encourage investments in the airline industry. This was done to reduce the risk, allowing airline managements to spend the millions of dollars to buy airplanes. Creating a non-predatory route system in the early days gave the airline industry stability. Deregulation eliminated the stabilized industry and turned it into a volatile industry. Originally up-starts were prevented from entering a market that couldn't support another airline. What the US Government has done is return us to the days of a destabilized, cut-throat industry similar to before government airline regulation. Good job Congress. You guys really know what you are doing. Reply Rating: (3) (0)
1/22/2009 1:11:59 PM by Don Livingstone The U.S.Airline Industry was strong and well organized under CAB regulations prior to 1979 Deregulation Act. Thanks to the misguided thinking of Alfred Kahn as well as President Carter and Senator Ted Kennedy. The above Act as well as those who favored the Act put our Airlines in peril. Now we have the "Open Skies" policy which will further erode the U.S. Airline industry. Reply Rating: (2) (0)
1/22/2009 2:52:52 PM Retired by Bob Ross Back in the 1930's, 40's and early 50's, the airline business had many problems that inhibited its growth and development. It was a risky thing to buy stock in airlines because the combination of crashes and company failures made the stock very unattractive. Three things happened that gave birth to a good, reliable, stable industry: The first was in the area of maintenance. Mechanics were required to be trained and licensed before they could work on an airplane. Second, the super reliable jet engine did a lot to create reliabality. And, third, The CAB was formed by the federal government to regulate the route structures to prevent predatory competition from destroying the small profit margins involved with airlines. No new airline company could start flying a route until hearings were held, and it was determined the route had sufficient traffic that would allow another carrier to be granted authority to fly it. These three things, created a huge difference in the aviation industry and investors bought in quickly because of the stability and reduced risk in the industry. There were other things that helped put the aviation industry on the map. The problem today is the industry has moved backwards 50 years and investing in an airline has gone back to being too risky. I think this is just the beginning of a long, slow gradual meltdown that is not good for American aviation, its hundreds of thousands of employees and all the supporting industry associated with aviation. Again this is nothing more than a failure in the making caused by a broken US Federal Government. Reply Rating: (1) (0)

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