IAH-OIL-TRASH

No link yet, but Bill Miller on CNBC this morning picks UAL as multi-year investment. Says DAL as better margin and twice market cap, but UAL (given a few years) will narrow gap for better stock investment.

mre5765

No airline is an investment. Save your money.

IAH-OIL-TRASH

Totally depends on your timeframe. Airlines haven't been an investment over last year? Airline stocks have whupped the market averages. Buy and hold? Probably not, but some things have materially changed since Crandall's statement, and some select investments actually might do well.

zrs70

Since I bought a few years back, my UA stock is up 160% and my US stock is up 220%. Jet blue about 8.5.

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 ).

http://www.flyertalk.com/forum/19254408-post41.html

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 -- and airline margins are still amazingly thin, they make their money on volume. I'm reasonably confident that these trends will continue but, obviously, the risk in the airline industry is in the unexpected. Wars, terror, pandemics, financial crisises, etc. can all pop up out of nowhere. That said, the airline industry today has significantly greater financial resources to weather the unexpected.

The current investment climate is a little trickier than last year. Asset prices have risen, and it's been more a function of money-printing than real economic improvement. This makes all stocks riskier, 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. Anyone thinking of investing in oil futures should contemplate this chart, which shows the meteoric rise in Texas oil production in the past couple of years:

http://www.aei-ideas.org/2013/09/sau...th-since-1980/

Despite tepid demand, this production increase has not lowered oil prices. A Pew study last week illustrates that few Americans know about the revolution in the USA oil industry, and I'm certain the Wall Street financial players under-appreciate all the new physical supply. At some point there will be a day of reckoning, but nobody knows when that day will be. It will have a profound impact on the US airline industry; initially positive but harder to predict down the road. Definitely a huge investment uncertainty, but one that is likely to be more positive than negative.

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'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. 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.

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.

EDIT: I forgot to mention, but CEO Smisek bought a bunch of shares on the open market in the high 20s a few weeks ago. Anyone will tell you that the CEO buying shares is a good sign, especially in the airline industry. If we happen to see those prices again, and we might here, you could certainly make a good argument that the potential rewards outweigh the risks of investing in UAL at that price point.

IAH-OIL-TRASH

The new supplies of oil from the Bakken and Eagleford are extremely dependent on oil prices. Due to low production rates (relative to conventional oil) and density of wells required to effectively recover this oil, high oil prices are required. A drop in oil prices quickly affects operators at the margins of these plays or those w/ marginal wells. Operators onshore U.S. can stop drilling on a dime if it looks like prices won't give a decent ROI. This is a complete change from a conventional offshore play where you might have a billion dollars sunk costs in a platform and wells that you have to pay off no matter what the price is. This new unconventional production will not cause a significant drop in oil prices, because a drop in production would quickly follow a drop in price, leading to a price increase. The new supply can react almost in real-time to price changes whereas in the bad, old days of the industry, over-supply caused by huge sunk-cost-laden projects poured more oil onto an already oversaturated market. In 1999, you could buy a load of oil sitting in a VLCC tanker sitting off Rotterdam for $5/bbl. That's probably not ever going to happen again.

Airlines basically are not going to have the big swings in oil prices that, for example, allowed Southwest a huge advantage a couple of years ago when they hedged a multi-year fuel supply at low cost. I haven't looked into it recently. but I don't think any domestic airline currently has much of a fuel hedge advantage over the others. Now they have to compete on other factors.

halls120

If I was going to buy any airline stock, it would be AS or WN, as they pay dividends. Given that the dividend yield of both AS and WN is pitiful compared to what you can get elsewhere in the market, I agree with Bob Crandall.

spin88

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....

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.

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.

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...

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.

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.

IAH-OIL-TRASH

I wouldn't buy any airline as a dividend play. Strictly a share appreciation gamble with a mid-term time frame. And I rolled the dice this morning at $31.271. Now I'm a 1K Million-Miler Shareholder. Talk about entitlement. I'm gonna ask for a second sundae tomorrow as a dissident shareholder.

halls120

I agree. At my age, I stay from "share appreciation" gambles, and focus on dividends. I've passed that point where I am comfortable with looking at the mid term.

demosthenes1

I thought one of more interesting moments at this year's Berkshire meeting happened when Bill Miller stood up to ask a question. To paraphrase, he pointed out that Warren and Charlie had changed their long held beliefs about railroads, and he wondered if they thought that similar trends were now making airlines attractive.

I thought the question was interesting because it showed that Miller was clearly thinking about the industry, which is confirmed by his comments today. I also thought it was interesting because Warren and Charlie absolutely refused to bite. They acted like they hadn't thought about the industry at all.

iahphx

The point I think you're missing is that almost EVERY major industry acts somewhat as an oligopoly. The previous situation where you had something like a dozen major players in a $100+ billion business was quite unusual. A smaller number of competitors is a much more common economic arrangement. Remember, even in these flush times for airlines, their profit margin is only 2%. Are you going to seriously argue that these are windfall profits that demand government intervention? Obviously the AA/US merger isn't really any different than the previously approved combinations (indeed, these 2 carriers hardly "compete" against each other today, unlike say AirTran and Southwest). Should it be our national policy that airlines aren't allowed to make any money?

I'd also note the huge fact that almost nobody, including you, is considering int'l competition. It is laughable to think the US airlines have any monopoly on international routes. Indeed, going forward, it seems likely that the US airlines are fairly weak int'l competitors. I mean, do you prefer to fly them? It is certainly in our national interest to have 3 strong int'l airlines.

Yeah, for an individual looking to invest in airlines, I wouldn't worry too much about dividends. In the past 5 years, dividend paying airlines (aka LUV) have greatly underperformed their peers. That said, more airlines like DAL are now paying dividends, because they're starting to accumulate more cash than they feel they need. Personally, in most situations, I'd generally prefer if they paid down their debt more. The only real benefit of a dividend is that it can prevent truly silly pricing -- like when LCC stock was worth only a couple of bucks a year or two ago. A small dividend would have amounted to an inconsequential cash expenditure for the airline and would have protected the company's owners (the shareholders) from silly momentum trading moves.

IAH-OIL-TRASH

Well, probably not. Berkshire has always avoided uncertainty/volitility, and their outlook is much longer range. I don't think Miller is looking that far out and sees a mid-term bargain now.

spin88

First, you are welcome to whatever economic theory, or view of appropriate rate of return, etc you want. It has absolutely no impact on the antitrust issues. The ONLY issue will be if combining AA and US will - by increasing pricing power - drives up consumer prices. Nothing else matters. I challenge you to find a single legal analysis with anti-trust experience who will say that anything else will matter in this case (given that the failing enterprise/FTC v. International Shoe defense is not being asserted). I have not seen any, nor for that matter anyone with legal training who says the merger is more than about 30% likely at this point (I put it at less than 10%).

The law is clear. The judge is not going to change the law (to for example say that companies can merge to drive up prices provided their ROI or margin stays under x) and good luck with congress.

I just find it mystifying that large segments of the analyst/financial community keeps prattling along about things as if the law runs by wall street rules. It does not, and that is a damn good thing IMHO. That much of the street keeps putting out totally ignorant analysis says to me that they are just not that bright. I am fairly good with science (got an A in engineering majors' physics at Cal ) but when I want to look at e.g. a geologist report, I listen to what the geologist has to say, I don't spout off my own private theories about where oil can be found.

Likewise, when I go to Hong Kong or England, I don't try to drive on the left side of the road, I don't think I can change the laws. This is a legal case, and will be decided under well established legal principles.

Second, I fully agree with you that International is not being considered. It is not being raised by DOJ, but they don't have to. The anti-trust laws don't allow airlines to gouge consumers in the US with higher fares so they can be a better international competitor.

But OT I do think that DLs new product and AAs new product is competitive with most foreign competitors (excepting the SQ, CXs of the world) and that combined with domestic feeder networks and being American flagged and their Mileage programs will keep them in the ball park for most American based fliers.

FlytheTail

I've had similar good fortune with DL and US, and have been selling DL stock in tiers as it continues to increase in price. Also have a transportation mutual fund that is doing very well.

You can add DL to this list, as they started paying a small (1%) dividend with plans to increase that in the next few years.