Hi Tom,
Good to hear from you again...
Regarding the airline stocks, there's more than ample reasons to avoid them, even in the best of times.
Airlines are one of those entities that play the children's game of "Monkey-in-the-middle". They are caught between the interests of enhancing shareholder value, providing fair and equitable remuneration for their employees, and providing safe, reliable and economical services for their customers. Unfortunately, over time, they have been largely unable to meet the expectations of those folks whose needs they serve.
Customers have always had advocacy groups fighting for their interests, be it private organizations or "gubbamint" agencies enforcing rules and guidelines that many times might seem to favor the interests of the consumer over the interests of others, including any investors in the industry. This is an industry where only one failure to properly deliver the services purchased (in the eyes of the customer) will forever alienate that aggrieved individual from becoming a repeat customer. Too many opportunities for failure here, from flights being late or delayed to lost luggage to just plain rudeness on the part of but a single airline employee to mis-assigned or double-assigned seating.
Likewise, employees have their powerful unions (as well as "gubbamint" regulations) that very capably represent their interests, sometimes to the detriment of the interests of the common investors. Employees deserve to be treated with respect and dignity, receive remuneration that is directly related to their work efforts and training, and to have some degree of job security. Too often the airlines have unintentionally failed their employees in one or more of those areas. And too often, the unions have over-reached and obtained pay or benefits in excess of what an employer can reasonably deliver.
It should come as no surprise to anyone that practically no one represents the interests of the shareholder. Yes, the airlines have tried to align employee interests with shareholder interests by compelling employees to become shareholders as well, but by and large, this effort can only be characterized as a complete failure, as the cyclical nature of the transportation industry has decimated the value of the various equities to the point where employees no longer desire to be shareholders as they once did.
As an individual investor, I can say that I personally take painstaking efforts to avoid this industry like the plague. I see this as a zero return industry for the average investor, and relegate this area to professionals who "know" when to buy or sell, and have in-depth knowledge of the industry and its cycles. To me, this is not an industry compatible with the buy-and-hold strategy, but an industry that strongly favors those investors that frequently trade their holdings.
Also, there are other reasons to avoid airlines as well, such as the sometimes high cost of airline fuel, the enormous load of debt where interest payments just absolutely suck up cash like a money pit, the high costs of maintenance and replacement of the fleet, and now the threat of terrorism with its incalculable financial and non-financial risks.
I really see only one viable business plan in the whole industry, and that is the path that Southwest has chosen to follow. The plan is very simple, in that they avoid debt and make major purchases from available cash flow and retained profits. They avoid the market share game (read: trap) that virtually every other airline pursues. And of course, with no debt, there are no debt servicing costs, and those monies flow directly to the bottom line. And since Southwest does not use assigned seating, they avoid any costs or failures in that respect as well. But Southwest is not without risk itself. They mostly fly short hop routes, or "pond-jumping" as it's called in the industry. Because of the fears of terrorism, many people that under normal circumstances might have taken a flight for a short trip, now opt instead to drive. So the bottom line is as you indicated in your post: Be careful!
Good luck with your investments. As always, it's good to hear from you again...
KJC |
