Why Vegas is a Better Bet

Since the horrific tragedy of September 11, 2001, the airline sector has been slow to recover. Air travel steadily declined in the years after, but we are now beginning to see some improvements in air traffic. The industry remains in a crux, facing intense price wars and high oil costs.

 Faced with mounting debt and reduced cash flow, the government provided loan relief, but this bandage solution is not working. The sad reality is that the trend in the airline sector has been negative since 9/11. Air traffic and passenger miles are increasing but the old structure of the airline industry is failing. Why anyone would invest in airline stocks is beyond me. The risk is too high versus the potential. You might as well go to Vegas and take your chances on the slots.

 Do you hear a hint of pessimism in my sentiments? Look, the industry is a longer-term turnaround project, moving towards rationalization and cost control. It has no choice. If margins are low, as they are, you must cut costs.

 I no longer get meals on short-haul flights. I get a bag of peanuts and a drink. Anything more will cost you. I also have to pay for seat selection. But I’m not complaining, I understand. I’m grateful for the bag of peanuts, but please don’t make me bring my own toilet paper!

 Just last week, US Airways Group Inc. (UAIRQ.OB) and America West Holdings Corporation (NYSE/AWA), two airlines operating on the fringe with a minuscule combined market-cap of $244 million, announced they were seeking to merge in order to fight low-cost rivals.

 If the merger is approved, which I fully expect since there are few options, the merged company is expected to compete in the new low-cost climate of air travel. But despite the optimism, I do not expect mainstream airlines to be able to compete with established low-cost carriers.

 The merged company said it wants to compete against lower- cost rivals such as Southwest Airlines Inc. (NYSE/LUV) and JetBlue Airways Corp. (NASDAQ/JBLU).

 Great idea, but I say, “Good luck.” They seek to overthrow the incumbent low-cost carriers. My view is that this is simply an exercise in futility. It represents a last ditch effort to survive.

 In the discount area, the carrier that is the granddaddy of all discounters and that every player wants to emulate is Dallas, Texas-based Southwest Airlines. The carrier focuses mainly on point-to-point routes (direct, non-stop city-to-city) rather than hub-and-spoke service (including indirect flights). This is a significant difference that favors Southwest. Take a look at the price chart of Southwest. Since debuting in January 1980, the stock has been on an upward trend with the exception of several periods of consolidation as we are seeing now. But the long-term trend is positive and that is important. Southwest will be difficult to take down. In spite of the carnage in the airline industry, Southwest has reported some decent numbers over the past few years. Its ability to turn a profit year after year is impressive. Southwest has been profitable for 32 consecutive years. That is impressive, but definitely not representative of the industry.

 Unfortunately I’m not optimistic for the mainstream carriers. The trend is negative and will require a Herculean effort to turn around. For me, I’d rather take my chances in Vegas!