What are Airlines Doing Wrong?
Merger talks—United and Continental and US Airways, with its $8.65 billion hostile bid for bankrupt Delta—have the investment community a-twitter.
When AirTran made a hostile bid for Midwest Air Group, its stock jumped 4.1 percent while Midwest’s skyrocketed to 22 percent.
The first commercial airline—the St. Petersburg-Tampa Airboat Line— was founded in 1914. The line carried a total of 1,205 passengers without a single accident. It never made money.
Call the St. Petersburg-Tampa Airboat Line a harbinger.
Since its beginnings, 92 years ago, the airline industry cumulatively has never made money.
The idea that “investors” are seriously looking at airline stocks is a joke. These aren’t investors; they’re riverboat gamblers.
The real value of studying airlines is not to invest in them, but to see all of the things they’re doing wrong and avoid doing them to your business.
An Investor’s Nightmare
“Never invest in anything you can’t illustrate with a crayon,” said Fidelity’s investment genius Peter Lynch.
On the surface, the airline industry is simple—the transporting of people and baggage from point A to point B. This easily fits Lynch’s dictum.
Or does it?
The airlines are shackled with near impossible handicaps from top to bottom: huge salaries, pension obligations and total dependency on the yo-yoing price of oil.
How the airlines—especially the big legacy carriers (American, Continental, Delta, Northwest and US Airways)—remain in business is a mystery. Basically, many different companies and industries are too dependent upon them to let them fold.
In a 2002 interview for the Sunday Telegraph (UK), Warren Buffett was asked if USAir was his worst investment. Buffett replied:
I made the comment that if a capitalist had been present at Kittyhawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money.
But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in.