Airline Stocks

About Airline Stocks

Airlines have destroyed more capital than almost any industry in history, and the reasons are structural rather than bad luck. Enormous fixed costs, no pricing power, a commodity product, aggressive competition, powerful unions, and a fuel bill nobody controls. Buffett called it a death trap and he was not wrong for most of a century.

The operating leverage is the whole trade. Once the schedule is set almost every cost is committed, so the last passenger to board is nearly pure profit and a small move in fares moves earnings enormously. That cuts both ways violently, which is why these stocks are cyclical trading vehicles more than investments, and why they get wiped out by anything that stops people flying.

Where the money actually is might surprise you: loyalty programs. Selling frequent flyer miles to co-branded credit card issuers is a high-margin annuity attached to an otherwise miserable business, and at several carriers it is worth more than the flying. If you are looking at this group at all, that is the piece worth understanding.

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