Why the Airline Industry Is Like Bananas

by: Zecco

By Richard Bloch

Felix Salmon has some good reasons why Google (NASDAQ:GOOG) is like bananas.

Bananas, you see, are mostly of the same species. Without diversity, a disease could threaten the entire worldwide crop. Without diversity, you end up with a monoculture that can easily be corrupted. As Felix notes:

The problems with monoculture aren’t purely agricultural, either. Anil Dash has a post up today about the decline of Google search quality, and diagnosing the problem as being that “Google has become a monoculture”; Alan Patrick quotes a commenter at Hacker News as saying that if search were more heterogeneous, spamsites would find it more costly to scam every site.

I think the same thing could be said for the airline booking industry. Sites such as Orbitz (NYSE:OWW) and Expedia (NASDAQ:EXPE) have recently been battling with American Airlines (AMR) over how people book flights. Now it appears that Sabre will also display American’s flights less prominently.

With only a few online booking sites, airlines can be stuck if they have another idea on how fares should be displayed. That’s similar to the problem you might have if your company depends on search traffic from Google. Any change in search engine practices could kill your business.

There’s a bit of irony to this development. American, after all, created Sabre back in the 1960s. And in the 1980s, American was accused of using that system to gain an edge over other airlines (here’s an article from 1982 on the controversy).

Legacy airline challenges

Irony aside, American Airlines is simply trying to break out of the realm of being a commodity business. Everyone complains when the airlines charge for more and more services, but by encouraging bookings through its site, it can at least try be more nuanced in the way it charges.

If you’re a frequent loyal customer, perhaps not so price-sensitive on fares, I’ll bet those “nickel and diming” types of fees get waived. That’s something not easily accomplished with the current fare search engines.

There’s certainly precedent for this. Southwest (NYSE:LUV) has used its own booking system for years. It works pretty well, too. I can book a flight on Southwest faster than I can buy a book on Amazon (NASDAQ:AMZN) even if I know what book I want. And on Southwest, you can choose to pay extra for priority boarding, shorter security lines, etc. I assume it's listened to customers who evidently want these kinds of choices.

American’s path, however, will be difficult. It’s a “legacy carrier,” one of the older lines that existed before fare deregulation back in the 1970s. Newer airlines like Southwest, JetBlue (NASDAQ:JBLU), and Virgin America were able to start from scratch without being saddled with high labor costs.

And while JetBlue and Virgin America – both of which seem to have devoted “fan bases” – do appear on some of these travel booking sites, I’m betting many of their loyal customers probably just book directly.

How will American do?

That’s a tough one – and I’m probably the wrong person to ask. I’ve never invested in an airline, mainly because it’s exceedingly difficult to keep track of how an airline hedges its fuels costs (a major expense, of course) and how much each is spending on airplanes that might not even be delivered for years.

There is, however, an airline ETF (NYSEARCA:FAA) managed by Guggenheim (formerly Claymore). I took a look at this fund and found it’s not exactly diversified. About 42% of its holdings appear to be concentrated in just three airlines – Southwest, Delta (NYSE:DAL), and United/Continental (NYSE:UAL). American represents only 4.25% of the fund.

Still, a look at this fund shows that it’s doubled since the ETF started back in January 2009. However, volume tends to be light – only 25,000 shares per day on average, which can mean high bid/ask spreads.

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Just for fun, here are charts for the same period for Orbitz, Expedia, and Priceline (NASDAQ:PCLN). Priceline and Expedia have done very well over the past two years or so. And it seems as if S&P upgraded Expedia shares on January 5.

Some may want to invest in some of these companies. But I think some or all of these stocks will be in turmoil until some of these booking issues are settled. On the other hand, maybe I’m just bananas.

Disclosure: None