Seeking Alpha
Long/short equity, contrarian, investment advisor, portfolio strategy
Profile| Send Message| ()  

<< Return to Part 1

Back in September 2011, I was so jaded with U.S. airlines after yet another atrocious traveling experience that I wrote an article on the plight and pitfalls of airline stocks as investments. It attracted a few interesting comments, least of all that I knew nothing about airlines and to come back in two months and see that what I wrote wasn't worth the paper (or electrons) they were written on. I did post a brief update, including a piece on what I predicted (correctly) was a dead cat bounce with American Airlines (AAMRQ.PK), yet was still "advised" of how little I knew, and that US Airways (LCC) would be the big winner from AMR's demise (time is yet to prove that chestnut of free advice).

To recollect, the stocks discussed were as follows:

1. Delta (DAL)

2. United (UAL)

3. Southwest (LUV)

4. American

5. US Airways

6. Alaska Air Group (ALK)

So from September 26th, 2011 through to January 18th, 2012 let's see how those stocks have performed.

Ticker

26 Sep 11 $value

18 Jan 12 $value

$ Profit or Loss

% Profit or Loss

ALK

58.40

73.41

15.01

25.70%

DAL

8.17

8.92

0.75

9.18%

LUV

8.38

9.01

0.63

7.52%

LCC

6.13

6.04

(0.09)

-1.47%

UAL

20.46

18.25

(2.21)

-10.80%

AAMRQ.PK

3.32

0.41

(2.91)

-87.65%

The main premise for arguing that five of these stocks were not worth holding, was the poor level of service provided by the airlines, in what is essentially an industry based upon customer service. A bad business product or service suggests a bad investment. Yes people do have choices, and if they aren't happy (repeatedly), they will go to another carrier. Capturing a loyal market share is important if companies are operating in an industry that has razor thin profit margins. I haven't discussed previously the pitfalls and issues associated with fuel hedging, nor do I intend to now. Maybe the airlines are either too big, or not big enough? To gain greater efficiencies, better hub spoke architecture, and more suitable routes may actually require a few less airlines through an amalgamation with existing competition to make the business models more sustainable. That, and improved customer service, at every level of the industry.

So no, I don't profess to be an expert on the airline industry. I do however know what I like as a customer, and as an investor I see parallels that would either draw my service in (as a consumer) and my money in (as an investor). So my predictions on AAMRQ.PK were spot on; and if LCC is to be the big winner (as previously 'suggested' to me), then it will only be as a merged entity, and not in its current state. Almost four months on, LCC is still a loss (though not to the extent of UAL or AAMRQ.PK), whereas my tip was on ALK (up $15.01 / 25.7% per share).

Source: Why Airline Stocks Won't Fly: Part 2