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oldfart65 (43.79)

Should you consider the airline industry?

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October 29, 2013 – Comments (0) | RELATED TICKERS: DAL , LUV , ALGT

 After deregulation 30+ years ago, the industry went through a consolidation from DOZENS of major airlines to 5 and investors lost big dollars along the way.  Most have gone through bankruptcy in the past several years.  High capex, substantial sensitivity to fuel costs and union issues have decimated the industry despite exponential growth in numbers of people flying (and the feeling you are in a cattle car).  

THE GOOD NEWS 

According to CNBC, airlines are the top performing industry this year.  It used to cost me $300 to fly 300 miles but I just flew 2800 miles for $425.  You can't say the same about the auto industry pricing which has had the same issues and history over the same time.  The major airlines are now an oligopoly due to consolidation which gives them pricing power.  Everyone points to baggage fees but CNBC reports that 60% of all fees are to credit card companies for loyalty programs while baggage fees are next at 25%.  At the same time expense reduction is being maximized.  Counter help has been substantially reduced and even the boarding pass holders eliminated.  Now the big money.  The outlook for fuel costs looks positive AS WE APPROACH ENERGY INDEPENDENCE FOR THE FIRST TIME IN 40 YEARS.  Delta says that a 1 cent change in fuel prices (which averages 33% of all operating expenses) translates to $40Million.  Just like autos, planes are exponentially more fuel efficient.   Financing costs are at historical lows!  Block times (time each plane is idle),  which is the equivalent of of plant utilization for manufacturers, is very good.  I am investing a small amount of my portfolio as a value investment.

 PS- be careful of Delta which bought a refinery to reduce fuel costs and has lost nearly $70M on its investment and will lose more on this move.   7-Eleven tried this strategy with the Citgo refinery in the '80s and lost its shirt.

 

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