Airlines Rally but Interest Lags

 | Nov 26, 2013 | 12:30 PM EST  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

dal

,

ual

,

lcc

Nobody likes a chest pounder, but I'm going to keep coming back to this airline theme until I get some kind of indication that people are listening.

The airlines are galloping to new highs. United (UAL) touched $40 Monday, Delta (DAL) just relentlessly marches upward and U.S. Airways (LCC) is consolidating around $24 to $25. You might have heard that the government agreed to not block the LCC/AMR (AMRQ) merger in exchange for the merged airline giving up its gates at Washington Reagan and LaGuardia. If you look at this cynically, you might imagine that lawmakers are concerned about having to pay high prices themselves when they fly home on recess. Is there any other way to look at it?

A merged LCC/AMR, even without DCA and LGA still is going to be the most powerful airline in the world. There is little doubt that they, along with the rest of the industry, are going to raise prices. The great thing about that is that they have massive pricing power because ticket prices have been going down in real and nominal terms for decades. In two weeks I am flying to Phoenix to see family for $460. That's about 25% more than a few years ago. I won't even notice it.  Most consumers won't.

Mark Perry, economics professor at University of Michigan, now at the American Enterprise Institute, has done a lot of work on airline ticket prices.  In 2011, the average total fare (including baggage fees) was $365.23, versus $611.76 in 1980 -- without even adjusting for inflation!  Think about how remarkable this is, especially when considering the massive increases in fuel costs over the same period of time. This is the miracle of capitalism when freed from regulation. Consumers benefit handsomely -- and businesses are forced to get lean and mean.

Economic forces are shifting, however, and the airlines have found that they have some ability to increase margins. And they will. Even tiny increases in ticket prices can be a huge addition to the bottom line. This is why the airline stocks have been rallying so strongly.

The great thing is -- nobody, outside of a few smart hedge fund guys -- is talking about it!  Most of the investing world is used to airlines going bankrupt one after another, year after year. Warren Buffett (someone whose opinion I don't respect) thinks they're not investable. Many people agree.  Sentiment on the group continues to be horrible even after a year and a half of gains. Most people don't even know these stocks exist.

It's pretty rare that I get a trade like this right, but I have owned the airlines for about a year now, and I am sitting on big gains. I have no desire to take profits or to overwrite. And if the government decides to re-regulate them (not currently on the table, but it will be if ticket prices keep going up), then I like them even more. To regulate an industry is to protect it. Airlines were unimaginably profitable the years they were regulated.

You want to start an argument at Thanksgiving dinner?  Be sure to bring up religion, politics, or airline stocks. Uncle Herb will tell you about his mistreatment at the hands of the TSA and Aunt Ethel will complain about the baggage fees. And everyone at the table will miss this trade simply because flying is such an unpleasant experience. That's more gravy for you.

Columnist Conversations

Well this is confusing...our models were calling for a run to 2072 before a bearish reversal would be possible...
Revenue Trend Apple is one of the most remarkable companies in the world, not just because it has the largest...
HOG has topped out. The stock's twelve day winning streak is ending today with and ugly reversal. HOG o...
Seems like there was a bid underneath at the crucial 2:45 p.m. hour.. day saver? still not sure..

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.