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2014 marks the 100th anniversary of the first commercial air flight. What was once a fantasy has become so much more than a reality. It has become so much of our daily lives that we now take air travel for granted. Yet, this now common experience continues to be offered in a financial sector where profits, longevity, service, and confidence are arguably the most difficult to maintain.
The next meeting of the International Air Transport Association this week follows on the heels of the association’s recent downward adjustment in its outlook for global airline profits, from $18.7 billion to $18.0 billion. IATA’s CEO, Tony Tyler, observed yesterday that “Making ends meet for airlines has always been a challenge. There are strong headwinds from rising infrastructure costs, inefficiencies in air traffic management, a heavy tax burden and costly regulation.”
Nonetheless, the association party line is that profits will eventually improve. Despite a weak earnings forecast, the IATA predicts that “investors will see more favorable returns” in 2014, forecasting a full percent average increase in return on capital in 2014, up to 5.4% from 4.4% in 2013. I may not be the sharpest knife in the drawer, but from an investment perspective, I’m inclined to put my money where there is a wee bit more return on investment. At 4.4% or 5.5%, I would be more inclined to put my money in a bank, if it were not for the amount that they would steal from me in the form of unscrupulous fees and other feats of financial prestidigitation.
The most recent TSC ratings published its list of the Top Ten airline stocks.
In addition to the inability of most airlines to sustain profitability, the industry is plagued by its high-profile exposure. Everyone knows when a problem is detected on a Boeing 787 Dreamliner. The whole world was focused on the disappearance of Malaysian flight 370. Flying in any form, other than, for example, the first-class suites on Emirate airlines, has long since gone from comfort to cattle herding.
Having said all that, the sector as a whole is beginning to look a bit better. Over most of the past five years the sector has been at or slightly above or below both the S&P 500 and the DJIA. That is, until mid-2013 when it began to grow at a much greater rate. As of today, the aerospace and defense index has grown by more than 30% more than both the S&P and the Dow.
If one takes the time to compare company on company, it becomes evident that individual stocks in this sector are all over the board. For that reason, and because the fate of individual airlines is so closely related to organic operational matters and execution of strategic plans, I suggest investing in individual companies as opposed to in portfolios that contain aerospace stocks. You really have very little control over your investment in either event, but I suggest that it is much safer to be able to research and be informed on a more regular basis with a singular investment in a company in which you have a reasonable degree of confidence both now and in the foreseeable future.
Meanwhile, congratulations are in order for the industry. Happy 100th anniversary!
