Originally Posted by
iahphx
Interesting to see this old thread re-emerge. I look back at my comment from a year ago and feel pretty sage-like (unusual, when it comes to investment theories
).
I think the past year has proven that the USA airline industry IS very different now that it's become somewhat of a comfortable oligopoly.
You don't have cut-throat competition, and it's unlikely that we'll see that in the foreseeable future. Oligopolies tend to be reasonably profitable ...
I think that the oligopoly nature of the current industry (domestically) has allowed prices to stabilize, and that and falling oil prices have allowed the industry's margins to rise. This is why nearly all carriers stocks have risen. Airlines have always been a proxy for oil prices, and that combined with a lack of fare wars account for the sectors performance.
But I also think the market has begin to separate UAL from other carriers. The divergence in appreciation rates is quite stark.
And in full disclosure, I bought a bunch of DL stock last x-mas, and did so as I became convinced UAL was not turning around, and that would drive up DAL's stock....
Originally Posted by
iahphx
... but airline stocks have this extra unpredictable dynamic because so much of their costs are fuel. Fuel (in the form of oil) is the poster-boy for asset inflation these days. If anything, the financialization of the oil market has expanded, and the price of oil is largely determined as a financial asset class, not based on supply and demand. That said, I still believe that at some point supply and demand WILL MATTER to oil prices....
I agree, but I don't see (with current production trends) prices raising unless there is a major supply disruption, or world growth accelerates. At this point conservation moves are keeping demand flat (something that people tend to forget/understate in its impact), and I don't see that trend as changing for the next few years. I think that is also part of why airline stocks are doing well now, no one sees a price spike coming in the next several years.
Originally Posted by
iahphx
As far as UAL goes, you have the specific uncertainty of the US/AA merger lawsuit by the DOJ. Almost everyone in the industry (rightfully) thinks the lawsuit is nuts, which suggests that the DOJ will lose, but there's no certainty of that. UAL would probably be better off if the government wins, as it creates an effective duopoly with DL (at least for a few years) that limits competition.
I take 180 degrees the opposite view, I think DOJ is highly likely to win and your initial argument that the industry is acting like an oligopoly is exactly why DOJ will win. The law is very clear that this merger will be blocked. At most I give a 10% chance US wins. And as to who is better off if DOJ wins? The market has hammered UAL stock much more than other airlines whenever it looked like the DOJ would win, and UAL has rallied more than other airlines when it looked better for US.
IMHO UAL is counting on integration issues between AA/US to get back some of the HVFers it lost, and it also needs the extra margin that will come from consolidation and taking the US cheap fares off the table. If DOJ wins, AA will expand, putting pressure on prices and UAL will have stronger head to head competition at two of its hubs, and US will likely align with AA, which will hurt UAs reach, while keeping price pressure on UAL.
Originally Posted by
iahphx
I'm also increasingly concerned by the effectiveness of UAL's management. They have fantastic assets, and management is generally competent, but they seem better at bean counting than pleasing customers. I'm haunted by Gordon Bethune's advice that you can make a pizza so cheap that nobody will want to eat it. UAL's product feels cheap. Whether you're a top elite or an occasional flyer, I don't think you're going to be particularly happy with the experience -- and that's not going to be glossed over by the new "happy talk" ad campaign announcing the return of the friendly skies.
I think this is a good summary of what has happened at UAL, and explains the poor revenue numbers. Lots of discussion of this in the 3Q 2013 thread, so I will not repeat it here. But I find your post interesting as I recall (and may be wrong) that you felt that things were short term operational issues last summer and the results would turn around. At the time I said the jury was still out, but I am curious (if my memory of your past views, and my memory is not always correct) when your views begin to change...
Originally Posted by
iahphx
If Doug Parker gets his hands on AA, he's probably going to out-manage UAL. It may take a number of years for this to become obvious -- and UAL starts with a network advantage -- but I would expect the new AA (if it comes to pass) to be more successful than UAL over time.
I think Parker is a smart guy, and has done very well with a bad hand at US. I also am optimistic that he will not cheapen AAs product of mile program, he does not want to risk the outflow of HVFers that he has said happened at UAL. I expect him to "go slow" with any changes. That said, I don't expect the merger to occur.
Originally Posted by
iahphx
Right now, UAL stock isn't that cheap (although a lot cheaper than last week thanks to an unexpected large increase in expenses -- another reason to be somewhat concerned about management). And you have the current uncertainty of the government shutdown: that's lowering fuel prices now, but it's also going to take some passengers off airplanes since government spending (rightfully or wrongfully) is now a huge percentage of economic activity. So it cuts both ways, but is probably more bad than good unless fuel prices really plummet. Bottomline is that the company is worth watching right now, and it's probably worth holding the stock if you have it, but it's not the most attractive entry point now for new shareholders.
I think that UAL is a very risky prospect at this point, as the recent 10% fall has shown. The stock as you correctly note "isn't that cheap" on conventional measures,
and the current price assumes that things are turning around at UAL and UAL will soon start to out perform other airlines. A sign that this was not happening (a 1% fall in PRASM, which is about $90M in lost revenue and about 20c/share in earnings, from prior guidance in 3Q 2013) caused a major move in the stock. If other signs show up (ongoing under performance in 4Q 2013) I assume they will cause a further decrease in price.
Put another way, the markets have little faith in UALs performance and management and any negative news will impact the stock strongly.
This said, I think that DL is nearing the end of its run up in stock price, and US/AA are very heavily impacted by what happens with the merger. You are really betting on that.