My parents divorced in 1981 and moved to opposite ends of the country, so I spent a lot of time on airplanes as a child. I was what was known as an unaccompanied minor, being shuttled between airport lounges at a time when parents didn't think too much about entrusting their child to fly across the country under the supervision of complete strangers. This got expensive for them: I clearly recall that a New York to Los Angeles plane ticket cost in excess of $700 -- a hell of a lot of money in the early 1980s, by any measure.
The airlines were not yet deregulated, and, believe it or not, these private companies were told by the government what they could charge on a particular route. The price was $700, no matter what airline you flew. So how do airlines compete with each other when they are all compelled by law to charge the same thing? As it turns out, they compete on service. That's why flying was so awesome back then. Lots of food, friendly flight attendants, movies, music -- all free. And now look at the state of things: You get charged for your bags and food, and then they try to sell you credit cards before you land.
Well, the first lesson here is that regulation is great for stocks, and the opposite -- deregulation -- is toxic. Deregulation of the airline industry forced them to compete on price. Unaccustomed to doing so, they went through wave after wave of bankruptcies. Conversely, layers of regulation protect industries as they create barriers to entry. It is one of the reasons I am so bullish on financials over the next decade or two -- they have been regulated out the wazoo.
Warren Buffett doesn't have too many good things to say about airline investing -- he famously quipped that someone should have shot Orville Wright at Kitty Hawk. But as seasoned as Buffett is, he probably hasn't seen an airline cycle quite like this one. One of the reasons the airlines are so appealing is precisely because they have been through round after round of bankruptcies, and after 30 years, managements have finally learned to run these things like a real business.
The business model is interesting. As much as people complain about the lack of amenities these days, people aren't really interested in paying for pillows and food. They are paying to get from point A to point B. And the industry has learned how to get people from A to B very efficiently, and charging for things that people want or need, like bringing their stuff with them. One of the best-performing airlines (and one that I fly often, out of necessity) is Spirit Airlines (SAVE), which will charge you for your seat and even the fuel that you will consume.
I just pulled up some cross-country flights on Expedia (EXPE), from LGA to LAX, and they were mostly in the $300 range. That is nothing short of astounding. Adjusted for inflation, $700 in 1981 is $1,800 today, adjusted for inflation. This means that a $300 cross-country flight is about 80% cheaper in real terms today vs. what it cost in 1981. Who benefits from deregulation? Counterintuitively, companies do not. But consumers do.
The upshot is that airlines have truly massive pricing power, whether they realize it or not. The major airlines are some of the best operators out there; they are lean and mean. I own U.S. Airways (LCC) and United Continental (UAL), and they are doing terrific, but Delta (DAL) is the one that is relentlessly putting in new highs. Any of the majors are suitable investments, and I believe that we are in the very early innings of an airline bull market.