It's hard to imagine the US economy without an airline industry. Business and travel would grind to a halt if we couldn't jet around the country at a moment's notice. Given how basic the industry is, you might think that airline stocks should be fairly bland investments.
Not a chance. Airline stocks are in fact "trading vehicles" says aviation analyst Ray Niedl. In other words, they are short-term bets. Traders place a wager on whether the summer travel season will be better or worse than expected. Right now, Niedl thinks the market is overly pessimistic about the summer travel season. He thinks airlines look cheap. But even if he's right, he isn't expecting to hang on until the fall. By July, he thinks these stocks may look pricey again.
And what happens in the fall? Higher oil prices perhaps, but more capacity for sure. Discount airlines and start ups are adding capacity. More seats chasing what looks like flagging demand may be good for travelers, but analyst Richard Aboulafia doesn't think it will be good for investors. He thinks this sector has hit its peak.
Comments
There was a huge boom for airline travel during the Bubble, and then 9/11 was the worst thing that could have happened.
If you take an airline with a functional, long term model, like Southwest, you see a 'fairly bland investment'. Most airlines don't share that model.
Most airlines juggle too many of the business variables, and they flip to the extremes. During the Bubble, they minted money, but signed big union contracts. The costs drove several airlines into bankruptcy. Now we are in another boom, with airlines off the mat.
If it weren't for all the things that entrench airlines, like 'slots' at key airports, the low cost model would probably win out. It doesn't take much to start an airline, but you can't fly the great routes so easily.
How different are the airlines coming out of bankruptcy from what they were? Are they lean and mean and able to roll with the punches, or boom and bust ultra-cyclicals? Why would any 'investor' believe in these recovering airlines?