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Reports & Commentary
Stage Set for Airlines?
Airline Comment, 11/13/2006

We feel the value in any number in the airline industry merely illustrates the unreasonably high rates of return investors demanded by investors. The limitations on the industries inherent cost structure and the post-bankrupt outlook, despite our “adjusted” risk premiums, should serve as an indicator of the rates of return investors demand for one of the least profitable industries in the world. Accordingly, the statistics cited are for “reference” purposes only and in no way reflect the industry’s investment merit (unless otherwise noted).

In the past two quarters some airlines have posted meager earnings—as a result, we have attempted to employ a hypothetical valuation system which has yielded the desired standard that we were looking for. Notwithstanding the fact that four airlines have currently posted a profit and some positive overtures might be gleaned, airlines defy established investment conventions and prospectively for the following reasons we see no meaningful change on the horizon:

  1. The constant flux, which despite some signs of encouragement, are chronic to the industries fundamentals.
  2. A major reversal in revenue passenger miles since 9/11.
  3. The hope that increased airfares might be sustained for a period of time in order to give the airline industry an interim boost and profitability, encouraged by labor’s designs on a share of future earnings.
Even prior to deregulation in 1978 the airline industry risk profile was substantial and the value as we see it in any numbers we cite are a reflection of the most extreme risk premiums.

In our judgment, the stage has not nearly been set, for any conventional approach to the airline sector, regardless of post-bankruptcy promises.
 

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