It happened again last night. At fundraiser for Tulane University, where my daughter attends school, I briefed people about how I liked the airlines.Their heads were spinning in disbelief. The first questioner went right to it: It's a terrible business with union problems and no profitability.
So let's go over it. The consolidation in the industry has been insane: United and Continental (now United Continental (UAL), Delta (DAL) and Northwest, Southwest (LUV) and Airtran. And my favorite is US Airways (LCC) and AMR (AAMRQ). The four largest airlines now control 80% of the volume. That's very different from the historical trends. In the last seven years, five of 10 airlines have disappeared. That's a ton of capacity and a ton of competition taken out. Overcapacity had always been a tremendous problem in the industry. That's no longer the case.
Why? Because the Justice department is blessing these mergers. We do not expect any resistance form the Justice Department to the US Airways deal to take AMR out of bankruptcy.
Just compare this moment to January 2001, when President Bush's antitrust division blocked the proposed United/US Airways merger because it would eliminate competition. The Bush administration's antitrust division was much tougher on business than the Obama administration, which may be hard to believe, but it's true.
The result? Oligopolistic fare increases are happening everywhere. Two weeks ago, Delta and AMR immediately matched a steep bump up in domestic change fees from $150 to $200. That kind of behavior never used to be tolerated but now it is routine. So is charging extra for bags and charging exorbitant prices for meager rations on the planes.
These practices are how Delta was just able to introduce a quarterly dividend of $0.06 cents and a $500 million buyback. The cash flows are now very big for these companies -- and it is far more consistent, as, for first time in 13 years, Delta actually was profitable in the first quarter.
Now, none of this would be enough if it weren't for several other huge factors:
- Classically, when rates went up like this, upstarts would come in underneath. But upstarts need new planes and you can't get them. The aircraft companies just don't have any to give you and they might not for a couple of years. You can't use the old ones because they consume too much fuel.
- Fuel itself has been and looks to remain stable. That's because of all of the new finds in this country. The lack of variability in the cost of fuel has been fantastic for airlines.
- The low-cost competitors don't want to compete. Take Spirit Air. Normally this low-cost carrier would be expected to go in against the behemoths and undercut them. Nope: the big boys have gotten out of so many routes that SAVE is just moving in where they have pulled back. They have no desire to be in a price war.
- Tame unions. We read today that the unions are at war at the airlines-but it is war with each other as each is trying to represent the workers at the new US Airways. Weakened unions means greater profits and these unions are no longer as powerful or as anti-capital as they once were. They want to keep their jobs.
US Air/AMR, soon to be just American, remains my favorite -- even after this run. This colossal combo will now control more than 50% of the traffic in Phoenix, Dallas, Philadelphia, Charlotte and Miami, all of which are huge hubs. Management is expecting savings and new revenue of a billion bucks by 2015, but I think that's quite conservative. The companies' combined loyalty program will have more than 100 million customers.
I don't know how long this will all last. But I do know that many investors have been burned too many times on these stocks. I know there are people who are suspicious that the Justice Department will bless AMR-USAIR -- even as the federal bankruptcy judge just approved the merger last Friday and the deal is supposed to close by September.
All I can say is that no one -- and I do mean no one -- has been a bigger hater than me of these stocks. But now I like every single one of them, with the best being US Airways.