I read a very good article on the Wall Street investment blog SeekingAlpha.com this morning about the latest round of airline mergers and how it will affect the Airline Industry and I want to share some of it with you. The article begins with a brief history of why airline stocks were very unpopular in the recent past, but that now the airline industry is headed toward stability and profits, which are two things that have been elusive for the industry in the past.
The article begins: “Few sectors are as unloved by most investors as the airline sector. Multiple bankruptcies and a history of at-best inconsistent profits have scarred many investors, and turned a host of investors away from the sector. But, as the past year has demonstrated, this has been a mistake. We have been bullish on airlines for some time, recommending that investors buy shares of four different airlines. The response to our articles has been mixed, with many investors arguing that investing in airlines is little more than a fool’s errand, one that will inevitably end in losses. So far, that has not been the case.
Aside from Hawaiian Holdings, investors who followed our recommendations to purchase shares of Alaska Air Group, Delta, and US Airways have earned returns far in excess of the S&P 500, and we believe that in the long run, these 3 stocks (as well as Hawaiian Holdings) will continue to generate profits for investors. In our view, the merger of US Airways and American Airlines signals the end of the sector’s consolidation. But, even as this era ends, an era of stability is set to begin.
With the bankruptcy filing of American Airlines, every legacy carrier in the United States has now been through bankruptcy, streamlining their operations and creating cost structures that are more competitive in the long run. And consolidation (more on that later) has reduced competition among the legacy carriers. With the merger of American Airlines and US Airways, there will now be only three legacy carriers in the United States: United, Delta, and American Airlines (which will succeed the US Airways brand). Over the past several years, legacy airlines have been rebuilding their balance sheets; strengthening their cash reserves and paying down debt to ensure that they can withstand macroeconomic stress far better than their histories suggest they can.
While industry-wide deleveraging is a material positive for the industry, it is not the only factor that will lead to continued profits for airline investors. The end of the era of airline mergers will set the stage for a more profitable, more stable industry, and offers the potential to finally bring peace of mind to airline investors:
We understand that many investors are likely to be skeptical of the airline industry, even after the meaningful progress that has been made over the past several years. And with the number of legacy airlines set to fall to three once American Airlines and US Airways merge, industry-wide profits are likely to rise in the long term as competition is reduced. Healthier airlines will lead to further peace between management and airline employees, and with many management teams now focused on shareholder returns rather than market share, airline investors should benefit. After years of turmoil and uncertainty, we believe that the airline industry is poised for an era of stability. In the long run, we think that an investment in the airline industry will be a profitable one. The airline industry of today is nothing like the industry of even a few years ago. And as more investors come to realize this fact, we believe that share prices of many companies within the sector will continue to rise.”