The 10th Man

Quit Your Airline Bitching

April 7, 2015

Every once in a while, I’ll be finger scrolling through Twitter and I’ll come across a tweet from a journalist about how oil prices are going down and airfares are going up, so something must be done. I mean, shouldn’t all businesses pass along windfall profits to their customers? Shouldn’t there be a law or something?

For a little history, let’s think about the fact that the entire airline industry has been through two big waves of bankruptcies in the last 20 years. Just about every airline has gone bankrupt at least once. They couldn’t control costs. They neglected to hedge fuel prices. Labor disputes. It’s been one thing after another, including 9/11, which induced the biggest travel slump in history.

Warren Buffett even quipped that someone should have shot Orville and Wilbur out of the sky, airlines have destroyed so much capital. Just to prove that Buffett is wrong about a lot, airlines have been one of the best bets in the stock market the last few years—breathtaking, actually. (My airline pick in Bull’s Eye Investor (not DAL) offers a great entry price right now.)

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These days, Buffett doesn’t do much buying when people are fearful—he buys negative growth businesses at a 25 P/E if he can get preferred stock and defer his taxes, not a strategy that is available to most people.

Anyway, back to my original point: There’s this crazy talk about how airlines are some kind of public utility that should only be allowed an “acceptable” profit margin so you and I can continue to fly coast-to-coast for $300 round trip.

Next thing you know, we’re back in the 1970s (when tickets were much more expensive, imagine that).

I think we as a country need to have an honest talk about what the role of profit in society is. It seems these days we’d like to turn everything into a public utility. The utilities themselves deliver electricity the same way they always have for the last hundred years—no innovation whatsoever. Banks are essentially utilities now—we condemned “excessive” risk taking, but now we’re starting to have the opposite problem. The Internet is a public utility now, with consequences we can’t even comprehend.

Somehow American capitalism has devolved to the point where we’re okay with profits, as long as they’re small profits. Nobody is allowed to kill it anymore.

And admittedly, the airlines are killing it. There are now four major carriers in the US. They’ve squashed their cost structure after years of restructuring, and oil just took a giant dirtnap. It really couldn’t get much better. They’re rolling in dough.

So after going through 25 years of hell, people still have this reflex where they see oil go down and say, “Mr. Airline, you’re supposed to pass along those savings to me.”

No, they’re not.

They’re supposed to charge you as much as you can possibly bear, regardless of what their cost structure is. That’s business. The price of airline tickets is determined by supply and demand. The supply is restricted, after years of cutting unnecessary routes, and now everyone wants to fly again. It’s showtime for airlines.

This kind of economic illiteracy is pretty common (especially among journalists). Airlines are a notoriously volatile and risky business—one SARS virus and you’re done—and maybe the purpose of excess profits for a few years is so they can put something away for the inevitable lean times that will follow.

This is the sort of thinking that gets us in trouble, though. This is what gets entire industries nationalized, which is what happens when some congressman has his flight canceled and starts talking about how the airline industry is in the “national interest.”

Things that people think are too important to be left to capitalism are usually exactly the things you want left to capitalism.

On a side note, California could easily solve its water problem by letting the market take over and allowing variable pricing. I don’t like hearing the word “ration” in this country. If you give someone the opportunity to make stupid money solving a problem—guess what, the problem will get solved. If the idea of someone making stupid money offends you for whatever reason—I’m not really sure what to say.

As far as the investment merits of airlines go, well, for sure the easy money has been made. They say fortune favors the bold. As for Buffett, he’ll probably wait about five years and come in when the stocks are fully valued, buy one, and then work behind the scenes to get a gasoline tax hike passed.

I try to be cynical, but it’s hard to keep up.

Jared Dillian
Jared Dillian

 

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Comments

Stephen Fox

April 9, 2015, 4:42 p.m.

Usually love your comments, Jared, but on this one you’re a little bit wet.  If there were true competition then the airline that controlled its costs, maximized its profits and delivered better SERVICE than its competitors would win.  A look at the baggage fees, cattle like packing of the cabin with seat sizing that is heading in the opposite direction of the size of the average American’s derriere and phony “maintenance” problems and “weather” cancellations when they can’t overbook a flight shows that there is not competition or a level playing field.  The airlines that do provide good service are not allowed on certain routes due to regulations that the big four airlines want to keep.  Too many American businesses only want the “good” regulations that hinder competition, while fighting tooth and nail any attempt to impose “bad” regulations that hinder profit.

William McCarthy

April 9, 2015, 3:56 p.m.

Notice how we now have water restrictions and de-facto rationing of water in California. The joys of government monopolies and utilities. Only government can take something that is ubiquitous; such as water, and turn it into a rare substance. Imagine what they could do with food or energy if they could get total control of these essentials of life.

Barb Gilmour

April 9, 2015, 9:08 a.m.

Easy to make profits when you can skirt the antitrust laws.

Andy Toop

April 9, 2015, 5:05 a.m.

I’d be right there with you Jared if there was this little thing in the US airline industry called open competition. DAL looks great if you look at the share price chart but PE in the mid 50’s? after 5 years of modest revenue growth? after 5 years of reducing gross profit margin? after 5 years where over 50% of the net income is from deffered taxes?

There are a whole bunch of airline operators who do way better than any US major at cost control without having to sacrifice service levels. The US taxpayer would be miles better off if they
a) scrapped the Fly US act and allowed federally funded travel to go on the most effecient flight instead of the most US flight.
b) made the market truly competative by allowing any carrier to fly any route any time.

You are correct that leaving it to capitalism would be best, but while the US airline industry is protected like a utility and federally supported like a utility, quit bitchin that people are bitchin that it should behave like one. If they want to make a profit I’m all for it - but let them make it, not take it.


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