BioInvestor

Airline Stocks: Where Value Investing Takes Flight

I think trading airline stocks is the only way to generate any kind of return. It would surprise me if AMR went into C11, but I think in the short term--say the next year or two--it's not a bad trading vehicle for those that are looking for short term returns.


On July 8, Mark S. wrote:

AMR will be a good short-term buy - today it went up 11+%. You trade these things. You don't invest in them. I think some of these airline stocks will be good bets against oil stocks as oil prices drop. I just wouldn't put all of my eggs in one basket and I wouldn't keep my money in them for long-term. Still, if you're looking at a safer play against oil, DUG looks like a good ETF

Airline Stocks: Where Value Investing Takes Flight

Sad but true: none of the legacy carriers has. Southwest isn't part of this conversation.


On July 8, ProfessionalHFAnalyst wrote:

If memory serves, no US airline has ever returned its cost of capital. Even in the good times. Until there is a cartel/monopoly established where tickets can be sold at multiples of current prices, I would avoid this sector at all costs.

Airline Stocks: Where Value Investing Takes Flight

I want to make a couple of points on AMR to clarify the statements made in the article. I think that the analysis of the financial statements doesn't paint the entire picture. (I do think at some point it's probably in AMR's best interest to reorganize.)

While AMR has under $1 billion in cash, it has almost $4.9 in cash equivalents. The company has reduced its accounts payable by $5 billion: I am waiting to see exactly why this step occurred. The company is burning cash, but is solvent. Contrast this picture with the one five years ago, where shareholder equity was negative.

The statement that AMR is drowning in debt isn't wholly accurate, since the legacy carriers are all highly leveraged. An analysis of all the legacy carriers shows that AMR is in a better position than many of its peers.

In contrast, UAUA has weaker cash (and cash equivalent) position than AMR. Looking at income, the company performed worse than AMR in the latest quarter. Just like AMR, UAUA is bleeding cash.

Overall, AMR is in a better position than is UAUA.

LCC is an interesting case as it definitely benefited from its reorganization. The company still has challenges with the US Airways/American West merger. I haven't looked at the June numbers for LCC, but its income is trending in the wrong direction. Long term, LCC has a poor hub structure. LAS and PHX are areas of growth, but PHL isn't a good international gateway; PIT is a problem for the airline. CLT has advantages in terms of traffic, but it too isn't a good international gateway. Long term LCC, in my opinion, isn't going to be a winner.

Just like AMR, CAL has pretty stable revenues despite current market conditions. The company has, arguably, the strongest balance sheet of any of the legacy carriers. Its EWR hub is an excellent international gateway; IAH is a strong hub for Central and South America. CLE doesn't appear to add much in the way of value for the company. CAL lacks exposure on the west coast--it needs a hub. Of course, since the company will be one of the first to take delivery of the B787s, whenever they're ready, the airline will expand into Asia from its IAH and EWR hubs. CAL leases most of its fleet--it owns some regional jets. It's more difficult for CAL to park aircraft. It also can't raise funds against equipment as easily as, say, UAUA could. CAL is unlikely to enter C11, but leasing poses some downsides. CAL also owns many of the aircraft used by Express Jet (XJT), a company spun off from CAL a few years ago. Like CAL, XJT looks to have a strong balance sheet and relatively stable income; however, the company has very serious cash flow problems. Its stock price has collapsed (bigcharts.marketwatch....); the company should be delisted from the NYSE later this month or early in August. If XJT fails, CAL will be stuck with a number of non-performing assets: Embraer regional jets, which won't be helpful to its cause. CAL is, IMHO, still the strongest of the major, legacy carriers.

ALK has a weakening cash position; it does have relatively stable income and a relatively healthy balance sheet. Its cash position is actually weaker than many of the legacies. ALK is in a relatively good market where it has been able to compete quite successfully with LUV. It has done well and will likely continue to do well in the future.

The lesson learned from XJT, which is a great lesson for the airline industry, is to take a look at cash flow. The balance sheet is the past; the statement of cash flows is the future. I don't think that any of the legacy carriers represents a good investment opportunity right now. None of them is safe. At current oil prices--and the trend in oil prices--each carrier is in peril. My suggestion is to wait for the first legacy carrier to enter C11 (it would well be LCC), which would be good for the rest. Of the three listed in the article, only ALK and CAL are worth consideration from a committed investor. I wouldn't buy either right now; I would wait for major calamity in the industry, then purchase.

The ATM at the Airlines

sf94127, I disagree that the baggage charge is something that should be removed. There are passengers that simply don't need to check baggage. I believe it fair to disaggregate pricing and assess a fee for those that want to check their bags.

I think that the idea of a fuel charge is interesting. Airlines have tried this option quite successfully. For the case of the airline, the advantage of a charge of food or baggage is that this charge could remain after fuel prices moderate.



On July 5, sf94127 wrote:

I believe consumers would understand (but not like) a surcharge for rising fuel costs. Let this cost float with the price of jet fuel at the time they make the reservation. It may be a $400 flight has a $75 fuel surcharge; so be it. Get the cost out front, transparent, and get rid of the silly nickel and dime stuff which are just surrogates for real issue of high fuel cost.

The ATM at the Airlines

On June 28 at 12:39 AM Stock Miser wrote:

BlueDog, thats part of my point. If I go and do my research on finding an airline to get me from point A to point B, and only later discover I could have flown for less net dollars on another airline not charging such fees or charging less fees because I couldn't read the 2 point font that says I was going to be charged such a fee, I would have surely flown a different airline. . .

I already read this post when you wrote it on June 27. I don't think there's any reason to repost my reply!

What's Really Wrong With The Airline Industry - And Can It Be Fixed?

ford96exploder--the hub-and-spoke model certainly can cause issues in lean times, but when times are good, this model is exceptionally powerful and leads to much more successful results than other approaches, such as the point-to-point approach followed by Southwest. Of course, the structure that Southwest adopts appears to lead to a better overall performance. Hub-and-spoke can work.

There certainly is a diversity of equipment among legacy carriers. Part of the reason is that these companies serve many different markets. It's a small point, but Southwest really flies two different pieces of equipment: the -700 and -300 series aircraft aren’t identical. There's no question that the minimization of diversity practiced by Southwest is one of the factors that leads it to consistent profitability.

I don't think that knowing a business and focusing on financial issues are mutually exclusive by any means: Southwest does both.

Southwest has consistent, stellar results, but the carrier wasn't always burdened by high labor costs. In the 80s, LUV had a much more favorable labor cost than its competitors and certainly than it does today. Southwest is no longer a growth stock in that it participates in the business cycle: high labor costs are one reason for the comparatively lackluster performance of the company.

Unfortunately, when you start to talk about on-time performance, a credibility gap starts to open! The statement about Southwest getting to the destination on time, every time is just nonsense. Southwest has its share of delays. Consistent delays were the reason that Southwest pulled out of Denver well over ten years ago, and why it left San Francisco a few years back. It’s now back in both markets. Southwest does well in on-time performance, but others have done better. The Department of Transportation statistics released for March showed that Southwest ranked number 5 in the US. You can check out www.dot.gov or here's a link to a newspaper article on the topic: www.bizjournals.com/bi... Southwest did much better in April, beating all th legacies (check here www.bizjournals.com/wi...). Actually, here's a link to the Bureau of Transportation Statistics of the DOT: www.bts.gov/press_rele....

The comment about former first class passengers flying Southwest because of on-time performance is just nonsense. Certainly, the industry pioneered by companies such as NetJets competes to some extent with the premium services offered by legacy carriers. Southwest does not.

The ATM at the Airlines

BlueDog--bingo! :)

The ATM at the Airlines

Thanks Stock Miser, you made my point. Individual opinions aren't that useful, but if there's a theme shared by many people, we’re no longer talking about a single opinion.

Complaining and leaving are two separate and distinct responses: businesses will listen to complaints but respond to the loss of customers. People who complain don't necessarily take their business elsewhere.

You might want to ignore that wise business person you cited, because there's no evidence that I have found to support the notion that a disappointed person will influence a thousand potential customers. Twenty people might hear a story, but certainly not everyone in that group is going to react.

The ATM at the Airlines

dandbear, weclome to SeekingAlpha! Of course, I have been on many flights and never had a carry on that was deemed too heavy and had to be checked. Big deal. It makes as much sense for an airline to base its policies around me as it does around you. There is, however, a great site where people discuss, among other things, their experiences while traveling: www.flyertalk.com Individual experiences while traveling are interesting, but not really useful when analyzing companies.

Having the government involved in handling fees isn't going to happen. The trend globally is to have less government involvement in the business side of running airlines.

The ATM at the Airlines

Stock Miser, I think you're ignoring some of the factors which govern the airline industry.


I don't see the argument against fees as being valid. Airlines that impose--or that plan to impose--such a tariff have targeted the occasional, non-frequent flyer passenger. Most of that group is motivated by price. Only time will tell if such passengers rebel against the concept of paying a separate charge for baggage. In some respects, if an airline is to lose customers, the price-sensitive, infrequent flyer is probably the group that should be targeted first. Passengers with elite status within a program aren't yet affected by the baggage fees discussed by some of the legacy carriers.

The suggestion to raise fares across the board by $25 each way is something that most airlines would love to do; they can't. Even a casual observer of the industry observes that airlines are price takers. They're currently slowly raising fares, but an increase of $25 across the board just won't work: prices are highly elastic. Fees on the other hand are tried and tested: fees work for meals; fuel surcharges have been effective. AA and others will try these baggage fees; if they work, they'll stick. If they don't, they'll disappear.

I don't see that the ATM analogy bolsters your argument. The first important point is that the cost of a good isn't necessarily the determinant when it comes to price. The market determines the price. It would be frankly dumb for a bank to determine a price for the use of an ATM based on its cost of service when it can attract a higher price from the consumer. ATM fees have actually worked very well for banks. Just like the various and sundry fees attached to credit cards, ATM fees are a good source of income. The success of ATM fees (assuming the analogy with airlines is valid) should be a source of solace for legacy carriers, not concern.

I think it's clear that passengers are paying for the transportation of luggage; it is an inherent component of the ticket price; it’s even discussed in the contract of carriage which governs the travel. I read your objection to a separate fee as meaning that you don't like the various costs, or a portion thereof, to be separated out. That's a personal preference. The airlines are doing an experiment right now to see if the preference that you appear to have stated is shared by the flying public. As I said, if it works, expect such fees to stay; if it doesn’t work, they’ll disappear.

The ATM at the Airlines

nultech, the big question is, will you continue to fly US Airways?

US Airways is definitely taking the lead when it comes to fees: howver, the checked bag fee won't apply to frequent flyers--those that reach the threshold for elite status. Here's the link that gives more information: www.usairways.com/awa/...

US Airlines: A Put on Oil?

It's a very interesting article with a compelling argument. The same approach could be applied to any of the legacy carriers--a drop in the price of crude could benefit each of them. If oil drops, perhaps those not those who decided to hedge at the current price.

The ATM at the Airlines

I too am struggling to find the point of the article.

Just one point of information: I checked on the comment made on Continental Airlines. To date, CAL hasn't followed the lead set by AMR in charging for the first or second checked piece of luggage. The latest information from the airline is that they are studying the issue. Here's a link to a report on the topic: www.sfgate.com/cgi-bin...

I have never been a big fan of argument by analogy. If the concept is applied to shed some light on an issue by viewing it from a different perspective, that's one thing. If, on the other hand, an attempt is made to develop a parallel argument, in a different sphere, leading to the desired outcome on the topic of interest, other issues spring to mind. For example, how analogous are ATM machines and their owners when compared to airlines--not very. One could develop an argument using another analogy, say restaurants, and conclude that people actually like lots of choices and prices!

I think there's no question that, given a choice, rational people want to pay a lower price for the same good or service. Having said then, it doesn't take a lot of investigation to show examples of airlines in different parts of the world that really disaggregate pricing by charging lots of different fees, but at the same time, they realize strong passenger loads and growth. Moving from "not liking" to "not paying" is a big step. Time will tell if AMR's move is a good one. Banks have found that ATM fees work: customers pay them. They may not like it, but they do it.

Finally, the mandate to raise fares has been offered by many people posting on this website. It should be clear that, given the option, any business will try maximize revenues. Airlines are no different. In fact, airlines are constantly seeking ways to raise fares; however, these companies are price takers not price makers. The quantity demanded is highly elastic. In the past, at least, attempts to raise fares have failed. Carriers have been more successful this year, but there's simply no way that any carry can raise its fares today to the point where they're profitable and expect load factors to be unaffected. Airlines are doing the next best thing: reducing capacity. They can't affect the demand curve; they can change the supply. That's the way to raise fares.

Airline Deregulation: Now Do It for Real

User 209758, the issue of the "failed business model" gives me the opportunity to explain why you misrepresent, or perhaps mischaracterize, what I wrote.

The discussion was about airlines and the claim that people are essentially agnostic as to whether a carrier lives or dies. I cited as an example of furniture stores and how people swarm them once they have liquidation sales. I also said that failure of a bad business model makes the economy vibrant. You appear to interpret what I wrote to mean that the failure of bad business models is the *only* thing that makes an economy dynamic: something I didn't say. (It turns out that, when new technology comes along, an erstwhile good business model becomes old and stale. If it doesn't change and can't compete, it fails.)

One more thing, I never suggested that all airlines should be in bankruptcy. In fairness, you introduced the idea that "a large amount of bankruptcies are bad for an economy" in the same paragraph where you responded to my posted. I never discussed this topic.

So, a bad business model failing isn't meant to be read as a company retooling. They are two different points of discussion, which were included in different paragraphs.

We can dump the Germans. I thought it a comparison that didn't help the original argument.

I think that a remark such as "giant sucking sound" to describe a complex issue is, by its nature, pithy. Perot's comment was in the context of his opposition to NAFTA and the damaging effect that membership would have on the US economy. Back to what I wrote: I said "sure work is outsourced, but it hasn’t had a material effect on the economy" (keep that phrase in mind). If you go back and look at the sequence of comments: (i) you talked about jobs in China and India; (ii) I explained that outsourcing has had no material effect on the economy; and (iii) you responded by introducing NAFTA and outsourcing. Neither China nor India is in NAFTA! So, I did say that jobs are outsourced; I didn't talk about NAFTA. I am just trying to show that what I write is misrepresented or mischaracterized in your response.

Now I will tell you what I think about jobs going to Mexico thanks to NAFTA. It's bad for people in the US who lose their jobs; it's good for the US economy. This cycle of jobs going offshore has been repeated for scores of years. Textiles, steel, electronics, automobile production, the list goes on and it will continue to grow. When you look at the industries that are gutted in the US, you'll see a trend over time: there's much more value-add in the industries that are left behind. Workers--people like you and me--have to constantly retool and readapt.

I do dismiss the discussion because, as I said, I think that there is way too much emphasis on the role of leaders. Leaders in a democracy can set the tone; some even introduce ideas. That's it. Radical change is tough.

Your list of leaders is interesting. Churchill was certainly a good leader, but he had to fight to form coalitions during WWII even among members of his own party. The big difference between Churchill and the others you list was that Churchill was booted out of office before the war ended. While he certainly set the tone--and it would have been good for Britain’s enemies if some other cabinet member were the PM--it was the British people that did the work. I don’t agree with the importance of the role of leaders.

Somalia is an interesting example; let me offer you another country, Zimbabwe; there's a country with strong leadership! Give me empowered people over a strong leader any day!

I certainly agree that the US, among other companies, has the option of selecting and firing its leadership. The truth is that, in any western democracy, there may be a change in leadership, but there is seldom any radical change in the country. If you want to change a country, you have to change the people.

The US is at the forefront of many areas. Though as other countries develop--particularly those with a greater population--they will flourish too. Ultimately, the US economy won’t be number one anymore.

My guess is that your comment about taking orders is a nod to the service sector, which is now the largest part of the economy and, incidentally, a hallmark of a developed economy. Let me give an example, about one hundred years ago, in 1900, about fifty percent of the US population was involved in the agriculture industry either directly or indirectly. By the end of the century, there were less than two percent of people in that industry. It's not an issue. Economies change with time. The US economy will too. Manufacturing will become less important as other nations, with a better cost structure, benefit.

Airline Deregulation: Now Do It for Real

From my perspective, you did misrepresent what I wrote.

In the example that you cited about FAX machines, etc. you're supporting my point. FAX machines or the Internet are examples of new ways replacing old. People working in older technologies are displaced; they have the chance to retool; if they don't, they will to likely have to endure lower standard of living. You misrepresent what I said when you say that "These ideas and products did not come to us from failed business models." I said that the new replaces the old; I was talking about a dynamic economy where bad ideas fail; where good ideas thrive. The key thing to understand is that these businesses replaced something else. I talked about failed business models, but not exclusively. I also talked about new ideas replacing old ones. All new ideas are, essentially, an improvement on something old. All new ways of doing things replace something else.

I can tell you that I am completely correct when talking about pensions and the Pension Benefit Guarantee Corporation. Taxpayers don't give funds to this entity. You're surmising that the situation may change in the future. However, the facts are that taxpayers, today, aren't funding this entity.

My point about the German unions is that you provided a poor metaphor that, frankly, weakened the argument you were struggling to make. I have no idea if union workers are well educated. I do know that, in the US at least, union membership has seen a very steep decline--and it continues to vote. It seems that society is making its own decision about the value of unions.

When you say that "you mean to tell me that you have never heard of Ross Perot's famous quote?" That statement doesn't represent what I wrote. I didn't talk about Ross Perot; I didn't ask any questions about him. You introduced the quote; I ignored it because it's not relevant. I wrote that the facts simply don't support the claim that NAFTA has been a net negative for the US. Jobs have migrated south, but there has been no net job loss in the US. A pithy remark by a presidential candidate isn't something I find to be substantive.

Thanks for clarifying what you meant. There isn't evidence to support the thesis that the US is in decline. I am going to dismiss your discussion on the role of leaders. The organizational structure of the societies you cited in no resembles the US. A US political leader doesn't have the degree of absolute or autocratic power that existed in older societies. I don't see the analogy as being strong.

I think you're vastly overemphasizing the role of political leaders in a democracy. The US grows because of its people and the work the work ethic that they employ.

With regard to China, I have no great love for the country, but a virus has been let lose. China will surpass the US, but when it does, it will be a society that greatly resembles the US. What will bring change in China is a strong middle class. In fact, as property rights in China start to emerge--and private property is a growing concept--there's no going back. Change will be slow; however, I think that change in China is inevitable. Baring any catastrophe, it's also inevitable that China will eclipse the US economically in two or three generations.