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Stock Ideas Investors Daily Edge The airline industry is a mess in for serious consolidation
Stock Ideas Investors Daily Edge The airline industry is a mess in for serious consolidation 
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| The airline industry is a mess in for serious consolidation |
| Tuesday, 03 June 2008 | ||||||||
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The airline industry is a mess.Things are so out of whack that one airliner, American Airlines, announced last week that it was going to charge for the baggage that passengers check. Two things are obvious here. One, American thinks they’ve raised prices as much as they can without causing customers to bail out on them in droves. Two, they’re either clueless or clearly out of options. The airline industry is long overdue for some serious consolidation. And it’s finally beginning to happen. In April, Delta and Northwest decided to hook up. And now talks are heating up between United Airlines and Continental. But despite all the time airlines have spent in and out of bankruptcy, it’s still the same old talk about cutting costs, cutting corners and raising prices when the market allows. For example, here’s the brilliant strategy that Delta's president, Edward Bastian, articulated in response to high jet fuel prices: “We have moved quickly to mitigate the short-term impact of higher fuel prices by further reducing domestic capacity and taking a disciplined approach to costs and cash flow." YAWN. It doesn’t take a genius to figure out how airlines are doing. All you have to do is follow crude prices. The airline stocks move more or less in the opposite direction. The problems plaguing U.S. airlines should be well-known by now: unionized pay scales, legacy health and pension obligations, and a bloated and demoralized work force. In many ways, the airlines have been their own worst enemy. They’ve cut back and cut back on services and perks, that they’ve essentially commoditized themselves. How do you distinguish one airline from the other? One serves crackers and the other serves peanuts? That’s sure to cultivate customer loyalty. They have only one trick in their bag of goodies which saves them from being completely commoditized. And that’s their frequent flyer plans. But you know what? It feels more like blackmail than a perk.
I’ve stacked up a couple hundred thousand frequent flyer miles with Northwest. But I don’t care anymore. I hardly fly Northwest. Their service is mediocre and their tickets are expensive. I go mostly with the newer low-cost carriers. Have I made my case? There are plenty of reasons to hate airlines. As a passenger and a consumer, I’m not going to make you fly on any airline that is pissing you off. But, as an investor, I’d like you to reconsider your feelings about the airline industry... First of all, in terms of affordability, air travel has flown in the opposite direction of things like higher education, houses, and designer jeans. When I first flew to England back in 1973 to attend Lancaster University, the two-way flight cost me around $525. When I flew Rachie – my daughter – to England last year to attend Norwich University, the round trip cost $600. That’s nothing short of astounding. Taking into account inflation, the $525 price would have more than quadrupled. In real money terms, that ticket now would cost $2,444. It may not feel like it, but flying is a ridiculous bargain. People have to fly. And, globally, it’s inevitable that they’ll be flying in greater numbers. Higher prices may slow this trend, but it won’t reverse it. Flying is already taking off in Asia. For example, China’s domestic airline industry is just a fifth of the size of the U.S.’ domestic market, but it’s growing much faster. In 20 years time, it’ll be about half the size of the U.S. market. And market liberalization is in the air. Many more markets will soon receive a strong boost as governments ease regulations. New Open Skies agreements between the European Union and the United States and Canada are a start. Further market reform will open up Asian and North African markets. The result? The global airline industry will outperform the world economy in the coming years.  The airline industry isn’t so much broken as it is overcrowded. It’s mainly a matter of too many seats available for too few customers. If the industry continues to consolidate, supply and demand should rebalance. And then investors will be able to focus on the solid fundamentals of the industry – reasonable prices and growing demand. But that’s down the road a bit. For those of you who can’t wait, there is a way to invest now in the aerospace sector. My next article will show you how. Good Trading, Andrew Gordon P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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