If talk means anything, 2008 is shaping up as the “Year of the Merger” for the airline industry. Merger talk is having its effect on short-term stock prices for some of the big carriers and investment chatter is forthcoming from many of the Wall Street pundits.
Delta is leading the race in merger-mania so it seemed appropriate to invite Atlanta’s own financial guru, Joe Rollins, to weigh in on the discussion and lend expertise to the airline investment potential in this pivotal year. As you will see, Joe offers an insightful analysis as well as an entertaining look at the ease, allure, and glamour of flying just a few short years ago:
You’ve Come a Long Way, Baby!
By Joe Rollins
As a financial advisor, I’m often asked my opinion on what the future holds for the financial performance of various industries. With the almost assured forthcoming merger of certain airliners, many investors are wondering about the potential financial implications of that merger. To give some insight in that regard, I’d first like to reflect on how much the industry has changed over the last 40 years that I have been flying.

In the 1970’s, I was able to leave my home and park smack-dab in front of the old Hartsfield International Airport in Atlanta just a half hour before a Southern Airways flight’s scheduled departure time. You never really needed to worry about getting to the airport on time since Southern Airways flights never left on time anyway. Back then, there were no security or parking issues at the airport, and we certainly didn’t have to deal with any uncomfortable congestion once inside the terminal. Airline travel was efficient and uncomplicated in those days, but things sure have changed!
In 1975, I flew between the Tri-Cities Regional Airport in Tennessee and Atlanta fairly frequently, and I almost always took a four-engine propeller plane operated by Piedmont Airlines. While Piedmont was efficient at getting their passengers from Point A to Point B, they definitely weren’t known for being the ultimate ride in luxury. On most flights, the roar from the prop engine was so loud that you couldn’t even have a conversation with the person sitting next to you. Despite the bare bones nature of Piedmont, the return flight from Tennessee always had a ton of vacant seats, so it was easy to take a nap across all three seats in a row before arriving in Atlanta – definitely plus after a hard day’s work. Those were the good old days….when you could actually fly between the Tri-Cities Airport and Hartsfield International faster than it would take you to drive the exact same distance.
I doubt very seriously that many people remember when air travelers dressed up for a flight. Back then, it was actually quite common for men to wear suits and ties on a flight. Airline travel was an expensive luxury, and so people went out of their way to look nice. Although there was no dress code, you rarely saw anyone boarding a flight in blue jeans or shorts.
Air travel was cost prohibitive for most folks until the discount airliners entered the scene. One of the first discount airliners I remember was Braniff Airways, which was known for its big, loudly painted fleet of planes. I recall boarding a flight from Dallas to Wichita and growing concerned about the large chips of paints missing from the outside of the plane. It made me wonder whether the engines were equally ill-maintained, but nevertheless, the tickets were cheap and they got me where I wanted to go.
Like I said, times have changed. Airline travel has become a commodity over the last several years, so much so that whichever carrier offers the cheapest flights is the one that wins the customer. And this has led to some huge financial consequences within the airline industry.
Before airline travel was deregulated during the Reagan administration, there was a distinct difference in air travel and in the carriers themselves. Since all air travel was regulated, most big carriers offered the same perks and airfares. There really was no price advantage in choosing one airline over another due to government regulation, so folks tended to be loyal to one airline for the services it offered and the luxuriousness of the flights. You either liked an airline’s snazzy interiors, its exceptional meals or, of course, its attractive flight attendants. My preference in those days was Eastern Airlines, because they had a “stewardess,” who I hoped would take some special interest in me. (For those of you who aren’t familiar with the term “stewardess,” it’s the now unacceptable and chauvinistic term for “flight attendant.”)
These days, airfares have become the most important decision-making factor for air travelers. Most people are typically only interested in how much the ticket costs and whether a flight is leaving when they want to go. There are no luxury services offered by the various airlines anymore, and I highly doubt passengers evaluate an airliner’s safety history prior to purchasing a ticket. Folks just want to get where they want when they want, and for the cheapest price.
Turning to investing in the airline industry, it probably could be said that the last person who actually made money on an investment in an airliner was Howard Hughes. If he’d been allowed to hold his investment for much longer, he would’ve lost it too. However, when the U.S. government required him to sell his shares in TWA in 1966 for a net profit of $547 million, he was truly a man made wealthy by investing in the airline industry. Since that time, I couldn’t tell you how many times TWA has been bankrupt, but I’m probably correct in guessing it’s been in bankruptcy more often than not over the years.

It certainly can be said that the airline industry is one that has drawn many investors just for the “sex appeal” of the investment. People seem to have a romanticized view that investing in the airline industry will reflect that they’re adventurous, and that it will allow them to be a jetsetter on their own airplanes. It has been said that, if you really want to be a millionaire, it is good to invest in the airlines. The only caveat is that you need to make sure you’re a billionaire before you make that investment.
It is also true that the airline industry has suffered from its incredible inability to deal with competition. For a while, it seemed that another discount airliner was popping up every day, each with a better idea of how to fly cheaper than any other airliner. When Eastern Airlines announced it was shutting its doors (a sad day for Atlanta), many discount airliners stood in the wings, waiting to take over Eastern’s old gates at Hartsfield. As we all know, it wasn’t long before all of them also went bankrupt.
Starter airliners all seem to have a common trend from an investment standpoint. They all do well out of the gate (no pun intended) until the planes require some maintenance. JetBlue comes to mind as an example of this trend. As recently as 2003, JetBlue’s stock traded for as high as a split adjusted $31.50, only to be trading at a lowly $4.50 per share today – a decline of 86%. As long as their are under warranty, they seem to do fine. But once they are required to have some maintenance done, the airliner starts to falter. My point is that almost no one has successfully proven that the airline industry is easy to run, efficient or inexpensive to operate, which makes it a difficult industry to invest in. Only one airliner has been successful year-in and year-out – Southwest. Even so, Southwest isn’t a very good investment since it sold for $19 per share in 2003 and $12 today.
The airline industry suffered a major blow in 2001 with the heightened security requirements placed on them after September 11th. While it is true that the government bailed out the airline industry, they also stifled their ability to grow and be profitable with outrageous and ever-increasing security expenses.
When Senator Tom Daschle, former U.S. Senate Majority leader, pushed through the federalization of airport security, it was almost the proverbial fatal blow to the industry. Coupling the security cost with ever-accelerating fuel charges led to virtually every major U.S. airline operating out of bankruptcy since 2001.
While it is true that costs to commercial airliners have accelerated, virtually every industry in America has suffered the same fate. For example, FedEx and UPS do the same thing with packages that the commercial airline industry does with people – they get things from Point A to Point B at a charge. But the overnight shipping companies have added fuel surcharges to accommodate for the higher costs, and the overnight shipping industry has still continued to flourish. All truckers, railroads, and couriers have made adjustments for the higher fuel costs, but the airline industry just can’t seem to get it right.

Like I said before, a major component that hurts those who invest in the airlines is the airliners’ inability to deal with competition. It seems like the airline industry continues to be cutthroat to its own detriment. Almost daily, I read about an airline going up $5 or $10 on a fare, and since the other airliners will not also increase their fares, they are forced almost immediately to drop the fare back down. There is not one principal airline that can put through a rate increase and make it hold.
I think that the upcoming merger in the airline industry will do a great deal to financially benefit the industry. Unquestionably, there will be consolidation of two or three major airlines and that consolidated airline will be the only one that will fly coast-to-coast. There will definitely be many regional flyers and discount charter planes, but if you expect to fly coast-to-coast when you want to, you can expect to pay a higher price in the future for your ticket.
A good example of the ultimate decline of the airline industry is the fact that you can fly from Atlanta to Miami for less than half the cost of a Greyhound bus ticket. Something is gravely wrong with the airlines’ fare structure when someone can hop on a plane for less than half the cost of taking a dirty Greyhound bus somewhere.
It is clear to me that air travel will become more expensive in the future. However, I don’t think that’s an indication that airline stocks will become good investments. How long has it been since you were on an airplane that wasn’t totally full? I’m sure you’ve noticed that it’s rare for a meal to be served on a flight these days, and the days when you could read a magazine or newspaper on a flight for free are long gone.
Air travel is now a commodity and not a privilege, and there really is no way for the airliners to cut costs any further. Nevertheless, they continue to operate unprofitably. The future of airline travel, from a financial standpoint, is higher ticket prices. However, the never-ending competition keeps airfares cheap and available to all travelers, even with the incredible difficulties the airline industry faces today.
Mergers within the airline industry will occur, but not because it’s in the best interest of the consumers. Yes, there will be antitrust concerns, but believe me, the government will look the other way. The government wants these mergers to occur since the government will soon be in the business of bailing out the airline industry if they don’t happen. It is better to have the industry in the hands of private enterprise rather than run inefficiently by the government.
In summary, if investing in airline stocks today is of interest to you, I suggest you think twice about making that investment. It’s okay to buy one of those stocks for the short-term, but be prepared to lose money. If you truly enjoy the airline industry and want to invest in it somehow, then I suggest you research the stocks of Boeing (the airplane manufacturer), GE (which makes the engines), and Rockwell (which makes the instrumentations for airplanes). There are literally thousands of suppliers that furnish products to the airline industry, and each and every one is incredibly successful and highly profitable. Unfortunately, the only one that has been an ultimate failure from an investment standpoint is the end-user: the airline industry.