Here‘s Why it’s Not Too Late to Reconsider the Airline Industry…
Even the wealthiest of investors tend to avoid the airline industry like the plague.
Warren Buffett was famously quoted as saying, “How do you become a millionaire? Make a billion dollars and then buy an airline.”
It was obviously an emotional time for Buffett when he said this.
After all, back in 1989 the Oracle of Omaha sunk over $350 million into shares of USAir Group which is now US Airways.
By 1994, the stock lost 75% of its value.
Even as the world entered the new millennium, Uncle Warren’s pessimism continued to hold true as other airlines floundered.
The 2000’s were especially telling following the September 11th 2001 terrorist attacks which nearly crippled the industry for good.
As air travel plunged to all-time lows and spiking fuel prices wiped out revenues, the US Congress was forced to issue the first bailout of the 21st century – to the tune of $15 billion.
But the stimulus package doled out in 2001 did little to stem the bleeding.
Between 2000 and 2005, US carriers lost a combined $30 billion in revenue. Wage cuts soared to over $15 billion, and 100,000 industry employees were laid off.
Perhaps the pinnacle of the industry’s misfortunes came in 2005 when Delta Airlines filed for Chapter 11 bankruptcy.
At the time of the filing, the Company was drowning in $20.5 billion in debt – $10 billion of which was amassed since January 2001.
But only a few short years later, we have seen quite possibly the most remarkable industry turnaround in recent memory.
After a concerted effort to restructure how the industry operated, airline operators began to round the corner in dramatic fashion.
A number of carriers not only survived the turbulence, they’re now thriving.
With a much improved control over debts, labor costs, and being more strategic with routes and seat supply, the industry’s revival has been nothing short of astounding.
One look at the AMEX Airline Index clearly shows this:
Perhaps it’s time that Uncle Warren reconsiders.
Although the industry has seen a run-up over the past five years, there’s plenty of reasons why the resurgence will likely climb even higher.
From a cost standpoint, the second biggest expense for the industry after labor is fuel.
With advances in aviation technology and airlines trimming their cache of flight routes, fuel cost savings continues to make a tremendous impact on bottom lines.
Subsequently, as demand for jet fuel drops, so have fuel prices – another bonus for the industry.
So far in 2013, the cost of jet fuel has fallen by 8% from the previous year.
Of course, fuel prices are as volatile as they come. So there are other factors that investors might want to consider.
One of the key metrics that the industry uses to measure airline performance is the break-even load factor.
This is the percentage of seats that must be filled in order for the airline to break even.
From the 2012 chart compiled below by Wickham Investment Council, you can see that amongst the larger carriers, Canada’s Westjet airlines only requires a load factor above 74.1% in order to profit while United-Continental requires 94.32%.
In other words, UAL needs to have almost a full plane for every single one of their flights just to make money.
Another metric is revenue per passenger mile (RPPM).
This is the amount that a single passenger pays to fly one mile, in cents per mile.
Once again, you can see that WestJet pulls in the most.
After factoring the break-even load factor and calculating net RPPM, a handful of airlines begin to look like very attractive opportunities.
Finally, one other factor that investors should consider is debt load.
As I had mentioned earlier, carriers like Delta crumbled under the weight of their spiraling debt in the 2000’s.
Yet no sooner after they filed for bankruptcy, they staged an incredible comeback in the years that followed.
At the end of 2009, total debt was $17.2 billion. Three years later, their debt dropped to $12.7 billion.
By the end of 2013, that figure is expected to fall to $10 billion.
Consequently, investor confidence has pushed Delta’s share price to its highest level in five years.
Carriers looking to follow in Delta’s and other financially-sound operator’s footsteps should see to it that they have a strong handle on their debt load.
And seeing how airline stocks have performed overall in the last few years even in the midst of the current economic slowdown…it’s safe to say that most are committed to staying on the right side of the financial track.
For an industry that was knocking on death’s door not that long ago, there’s never been a better time to be bullish on its future.
Yours in profits,
for Top Stock Millionaire