Prior to the start of the pandemic, the four largest airlines in the United States equaled roughly $110 billion in total market value. Fast forward to, only a few months later, to find that the total market value of these same four airlines was $28 billion.
Delta, United, Southwest and American Airlines all suffered major losses during the stock market crash of 2020 as Covid cases spiked in the United States. State and local governments imposed lockdowns and travel restrictions, leaving investors fleeing from the airline industry in order to seek safe haven in companies such as GameStop and AMC.
As of today, the total market value of the same four airlines is roughly $70 billion, leaving over 30% upside to anyone willing to put up with the day-to-day turbulence of new covid-variants or the potential threat of state imposed lockdowns returning.
So, should you buy the Airline stocks? After all, didn’t Warren Buffet buy all FOUR of them? (Right before he sold them all at the March bottom. Buy high, sell low?)
For the short-term investor, there are no benefits to holding Airline stocks. Money managers are likely advised to stay away from these companies, and retail investors don’t have the patience to invest in anything that doesn’t jump over 1000% in a week. As long as nobody knows when the pandemic will officially end, stock prices for airline companies are expected to remain volatile.
So then, what about for the long-term investor? What about the smart money? Let’s take a look at the fundamentals of the overall Airline industry to determine whether any of the stocks are good long-term investments.
Fundamentally, airlines are despised in investing circles. They are reliant on loads of capital to grow (imagine the price of buying and maintaining a new airplane) and are dependent on fuel costs remaining low to push profits higher. Cash flows are inconsistent due to these factors and investors prefer a safer investment, over uncertainty.
Plus, they are highly competitive. The four major airlines have consolidated the industry, with each other pushing for lower flight tickets than their competitors. This will have a negative impact on overall profit margins in the future.
Add to that, the fact that most airlines are drowning in debt, doesn’t help either.
Ok, so, we have mentioned all the negatives. Why would anybody want to invest in this industry? Let me give you a contrarian view:
Flying isn’t a dying art. There is no better alternative to get from one country to another, unless you want to stow away on a cargo ship for 6 weeks without proper amenities. The cost of plane tickets are surely going to rise as fuel prices are expected to fall and (hopefully) the pandemic will be a thing of the past.
Oh, and, let’s not forget that good old Bob will definitely want to fly his kids out to Disney World, while his wife flies away with her younger boyfriend to a resort in the Cayman Islands. Surely, there must be a deep value trade in there, somewhere.
Good investors know that some investments take time to develop. It might take several years for Airline stocks to start pumping cash out of their businesses, but eventually it will happen.
I don’t care how smart Elon Musk is, he is not going to create a teleporter in the next 5 years.
See? He won’t have a house, let alone a way to develop a teleporter. We shall remain in the air for years to come!