How bad a business is an airline?
Stunningly bad. Especially if we’re talking about an airline serving one or more of the world’s developed economies. All you have to do is look at what a recovery in the industry looks like.
The International Air Transport Association (IATA) is calling 2010 a recovery year for the industry. Global airlines in aggregate will actually make a profit in 2010. That would make 2010 the third profitable year for the industry during the last 10.
In the first quarter of 2010 cargo volumes climbed 26% from the first quarter of 2009 and what’s called premium travel volumes (the seats that aren’t coach) rose 20%.
On a global basis airlines will make $2.5 billion in profits this year, the IATA projects.
But the recovery isn’t spread evenly across the world. Airlines in emerging economies are, by and large, doing better than fine. U.S. airlines are projected to make $2 billion in 2010. But European airlines are forecast to show a $3 billion loss for the year.
But to understand exactly how bad this business is, in aggregate, you need to take a look at the miniscule margins that $2.5 billion in global profits represents.
According to the Financial Times, the industry’s profit margin comes to just 0.5%. And this is in a recovery year.
The industry’s return on invested capital will be just 3% in 2010. That’s way less than all but state-owned or controlled airlines pay for the capital they borrow.
Hard to figure how the industry will afford to add a net 800 new airplanes in 2010.
Air France has the best meals. And they give you champagne (real Champagne, not just “bubbly”) in the Economy class for free.
java12jack,
If you absolutely MUST buy MSFT, then I’d recommend waiting for $24. That will limit your downside on it. However, I don’t recommend MSFT at this time.
Some insight in the airline industry :
http://www.economist.com/node/16271573
Whistle while you work… “I’m gonna buy BP @ $25, I’m gonna buy BP @ $25”.
My other idea is LONG EUR via PM. Tons of downside protection vs. straight long EUR, and a 20+ % upside. Nice divi. too.
What do you all think of these two ideas?
@java12jack–MSFT fall may be a short EURO play as well. What % sales come from the Eurozone?
I heard this from a friend. Sir Richard Branson was once asked how to become a millionaire. His answer was, “Start out as a billionaire and get into the airline business”.
Ed,
Nat gas? Anything you like?
S&P is 1055, a hair strike to Jim’s next test level 1045. Can it hold? What’s the next test level?
Folks:
IEA said today the spill is a “game changer” for oil! It will restrict supply!
http://www.reuters.com/article/idUSTRE6591RG20100610
Ed,
Agreed on ALK. Not a lot of competition in this arena. Also always scores great on flight rewards, customer service ratings, etc. Also looking at Delta’s decision to use Seattle as a strategic hub will play very well into their hands. They have a strong network in this area.
My comments on United were on the shifting strategy towards customer service, excellent plane upgrades, and change in loyalty programs. It usually takes about 2 years to work there way into the balance sheet. I’ve bought a few of these companies (not in this industry) where I have seen the business strategy change and do well. I’m much better at this type of investing than I am timing and trading charts!
The only airline I’ve seen that would be worth buying is Alaska Air Group (ALK). It is managed well, although it’s upside is limited. The nicest thing about it though is it’s well-moated, not having to compete much on it’s routes with the major airlines.
I don’t own it now, but I had some last year and made a small profit on it. If you’re looking for an airline to add to your portfolio, then ALK would be a safe pick. Ironically, even with the market tanking lately, ALK’s chart has maintained a nice channel up. I’d call it a solid buy at $45 (it closed yesterday at $47.85).
Faroos,
A big reason why emirates wanted the airbus is that it efficiently can transfer immigrant staff back to India, Pakistan, Bangladesh, etc. The routes it flies on have huge droves of these.
Also I fly long-haul at least 5-6 times per year and it is always interesting now quickly airlines can change. In the mist of all of this I think a real sleeper (financials are poor but different story) is United. Truly amazing turnaround in the last 2 years. Now one of my favorite airlines to fly (IMO better than euro carriers now).
I
Andruo11, Thanks for the article post. Still feeling Nokia may not last even though it’s the 800 pound handset gorilla on the block.
Jim, just to add to the mystery Emirates Airline announced yesterday that they signed a deal worth 11Billion for new A380 airbus. (additional to the early purchases of the same plain)
i think to many decision makers the airline industry is more than just numbers. maybe it is necessary to develop a tourism industry in the country, like how can you travel around the islands in Greece if they have no airline (even if it is still loosing money).
All:
Lots people are calling bottom now. Any thought?
Never will buy any industry or company which does not even know basic customer service! I even try to avoid fly on them, except SWA.
He has a short bit on Nokia’s future near the end of this article:
https://jubakpicks.com/2010/05/07/3844/
Hi Jim,
Straying from the airline industry, but sticking to the thread of maintaining seemingly shrinking margins, I wonder if you could grace my computer screen with any new knowledge you may have concerning Nokia. Nokia’s shares are really taking a beating lately and it seems that Apple is poised to eat Nokia’s lunch by releasing the new IPhone 4 in Europe, a Nokia’s stronghold, in June, before Nokia’s release of the NB handset in August. Also some question id Nokia can continue to pay its dividend. Thanks for all you do.
Jim or Ed,
Off this subject why do you think that MSFT stock been so weak lately? It seems that some other large tech have held up better. At what price would this be good to start buying?
I’ve never really been able to figure the airline business out. Surely these airlines can’t keep doing this forever–losing tons of money the majority of the time, barely eking out a profit the rest of the time. What would equilibrium in the air travel industry even look like?
Hard indeed – but with aircraft leases, equipment leases, lease factoring and myriad other exotic arrangements – it’s hard to say who is left holding the risk (and harder to guess who will actually profit). Embraer stays on my watch list for now.