Don't bother with the airlines
Posted
Apr 23 2008, 08:15 PM
by
Matt Koppenheffer
Airlines, ugh! what a lousy investment they've been recently. Is there a better way?
After managing to hit $40 per share back in early 2007, AMR, the parent of American Airlines, has plummeted over 80%. UAL, United's parent, peaked at $50 right around the same time and has since fallen to $13. Continetnal? Ditto. US Air? Ditto. I'm sure Delta would have taken a similar kamikaze dive too, but it didn't emerge from bankruptcy until midway through 2007. Everybody's airline sweetheart Southwest has held up a bit better, but even it's down nearly 30% over that timeframe.
Obviously, fuel prices have been a major ingredient in this stock slide soufflé, but there are plenty of reasons why airlines make lousy investments. Right off the top, there's very little that differentiates airlines and compels travelers to fly on one airline over another. Very little except price that is, and the airlines have found themselves locked in a self-defeating price war for a while now.
On the other side of the equation, we find an antiquated labor pool that allows the airlines precious little room to be flexible on costs. And forget finding any way to get around the crushing fuel costs -- since fuel is a commodity it's basically impossible to get much, if any, cost advantage there. And of course we can't forget the capital intensity of the business and how much investment an airline requires. In the letter to his shareholders this year, Warren Buffett even called out airlines for their "insatiable" appetite for capital and lousy returns.
Sure, some airlines are now raising prices because they absolutely have to, but you can bet that if fuel prices come down at all they'll have to cut prices right back down or risk flying empty planes.
So what's the answer for the struggling industry? While there's not much that can be done about fuel prices, it seems like out-of-the-box thinking (if you'll forgive the cliché) may be called for. Sooner or later I have to imagine that one of these airlines will figure out how to make their business attractive, but I'm very wary of betting on any one of them in the meantime.
Investors on The Motley Fool's CAPS service are of the same mind. Southwest, a "favorite" carries a rating of two stars out of a possible five. On the other end, UAL has attracted a lot of bears and sports a one star rating. Jeffreyw put his thumb down on UAL last week and said:
UAL has been unprofitable and gives the worst service of all of the major US airlines. Fuel prices rising and a Delta/NWA merger will only put pressure on UAL to merge as well. The problem is, no one wants to merge with UAL. They may be left to downsize or fail completely in a market they can't compete in.
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