We have officially removed airlines from our list of industries in which we would absolutely never invest.
Years ago, I decided it was a dicey proposition to invest in airline stocks and vowed to avoid them. It was an industry that always seemed to figure out how to shoot itself in the foot, and I could never figure out if any airline had a sane long-term business plan. Airlines always seemed to be “reactive” instead of “proactive.” And although some “experts” touted owning airline stocks, I never felt like I could invest in them with any degree of reliability.
Airlines seemed to hate prosperity, and they constantly figured out ways to avoid it. When fuel costs declined and airlines could increase profits, what would they do? They started fare wars with each other, thereby eliminating the profitable opportunity. When fuel costs eventually soared (which they ALWAYS eventually did), airlines were stuck with low fares and negative cash flow.
And what used to be a business that was friendly to passengers slowly became surly and jaded. Gradually, things that used to be a standard part of most flights (meals, checked bags and leg room) began to disappear. Flight attendants became less tolerant. Flying went from being a luxurious symbol of status to being nothing more than a quick way to get from here to there… a bus in the air.
Then came September 11th and an industry that was already poorly run was dealt a death blow. When terrorists flew commercial aircrafts into the World Trade Center and the Pentagon, the FAA shut down commercial air travel for several days. Travelers were stranded in inconvenient locations all over the world and the airline industry lost billions of dollars while their planes were grounded.
This even further cemented the idea in my mind that making money in airline stocks would always be difficult. When 9/11 occurred, the government didn’t shut down Walmart or McDonald’s. Your average corporation continued doing business as usual. But airlines were forced to wait until the FAA gave them the “all clear.” I decided that it is probably not a good idea to invest in companies that need to wait for the government to give them the “all clear.”
But things have changed. Over the years, one airline after another has filed for bankruptcy or merged with another airline, which is making us take another look at them. It’s not enough to get us all excited about investing in airline stocks right away, but enough to come off of our “absolutely no airline stocks” stance. There have been so many mergers and acquisitions that the reduced competition should increase their ability to raise prices. This industry might actually be able to make money in spite of itself. To name a few mergers in just the past five years:
- Southwest bought Air Tran
- Continental Airlines merged with United
- American Airlines merged with US Air
- Delta Airlines merged with Northwest
- Republic Airways acquired Midwest Airlines and Frontier Airlines
And those are just the domestic mergers/acquisitions. There have been quite a few more overseas.
I fly a couple of times each month, usually on Southwest because it flies non-stop to most of my destinations. It is rare that I am on a flight that is not 100% full. And Southwest frequently offers a few hundred dollars to any passenger who will give up his seat because they oversold the flight.
I remember when Southwest used to offer relatively low fares. You could get to Dallas or Oklahoma City for less than $100 round-trip. Not anymore. I routinely pay $600 – $800 for a round-trip ticket on Southwest. It is NOT the cheap alternative.
Full flights with much higher ticket prices are a great combination for airlines. Add the fact that the economy has slowly been improving over the past five years, and we have officially erased airlines from our “do not ever invest in” list. That doesn’t mean we will invest in them right away. The price has to be right. But at least we will consider them for the first time in a long time.
The economy continues to improve slowly… very slowly. Yes, we know 1st quarter GDP came in at -2.9%, but we think a large part of that was due to unusually bad weather in January and February. (When Atlanta shuts down, the weather is bad.) In addition, it appears that there was an unexplained and unexpected drop in spending on health care. This is most likely due to problems in the reporting and purchasing of health care under ObamaCare.
We feel the 2nd quarter will not come close to repeating the 1st quarter, although we concede that if the 2nd quarter doesn’t exhibit a dramatic increase, it will be a disappointment.
Last week the Department of Labor announced that 288,000 new jobs were created in June, continuing the steady increase of employment. It’s interesting to note that 1.3 million new jobs have been created and unemployment has steadily dropped every month since the end of 2013. Coincidentally (or not coincidentally), that’s when extended unemployment benefits were ended. It seems that some people got a job when they were no longer paid to be unemployed. At the end of the day, people are pretty predictable.
The official unemployment rate dropped to 6.1%, partially due to a reduction in the labor force as more people dropped out of the work force. This is a trend that will continue for many years as the Baby Boomers reach retirement age (except for those who lost their retirement nest egg through bad investing and have to keep working).
June posted another month of stock market increases, the S&P 500 gaining 2% and foreign markets up almost 1.5%. The twelve-month period ending in June saw a 24.5% increase for the S&P 500 and about 15.5% for foreign markets.
With no apparent significant headline risk, we see no reason for any meaningful sell-off in stocks. Second quarter earnings will be announced this month for most major corporations and it will be interesting to see how they did versus the previous quarter and versus analysts’ estimates. If we had to guess, we would expect more surprises on the upside than on the downside.
With the decreased unemployment rate, we expect to finally see a gradual increase in the cost of labor. Unionized labor still doesn’t carry much clout, but employers of specialized labor will eventually find the need to increase compensation in order to retain qualified individuals who are difficult to replace.
Having said that, we don’t see a massive wave of inflation in the near future. Housing, health care and transportation have experienced increased costs, but basic consumer goods (furniture, appliances, clothing, etc.) have experienced little to no inflation. The past quarter saw price increases in metals and energy, but it also saw significant decreases in the prices of many food commodities, including sugar, wheat, corn and soybeans.
At Boyer & Corporon Wealth Management, we still expect slightly higher interest rates before year’s end. At this time, we see no need to make significant changes to our portfolio allocations. We have been reducing (and will continue to reduce) our relatively large allocation to zero coupon municipal bonds, moving the proceeds into shorter duration securities.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.