AirKarp

The Seinfeld explanation for sluggish airline stocks

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Invoking an old Seinfeld bit, investor Michael Rogus, writing in Seeking Alpha, concedes that much of what US airline executives like Delta Air Lines CEO Ed Bastian and American Airlines CEO Doug Parker are saying about the industry is true. US airlines are being well run these days and their balance sheets do look pretty good, Rogus admits. But he nevertheless will take a pass on Delta’s stock, explaining: “It’s not you Delta—it’s me.”

Rogus simply can’t stomach investing in the airline business. This psychological barrier may help explain US airlines’ persistently sluggish stock prices even as the industry has boomed over the last several years. Can the airline industry ever overcome the perception that airlines are a bad investment?

While Rogus thinks it is well and good US airlines are in better shape than in the past, he points to what he sees as a number of structural issues that keep him from putting his money in airline stocks:

Because of their size, the maturity of the US market and the high cost of aircraft, US majors can’t grow revenue fast enough. A tech company has “low capital costs” and is “immensely scalable,” he writes. But Delta’s revenue “is simply not going to double in five years,” Rogus writes. Other factors he cites include volatile oil prices, labor unions and competition from Gulf airlines. And, of course, the old bugaboo: he ultimately believes US airlines haven’t really changed that much. Regarding unhealthy capacity expansion, “they’ll be back to their old ways soon enough,” Rogus predicts. “It’s just human nature.”

How can the industry overcome these perceptions? One is to simply keep performing, year after year. Eventually, the past will fade from many investors’ minds if strong profits keep rolling in. Secondly, airline companies have to think of themselves more and more as digital companies and not merely aircraft operators. Many are moving in this direction, but perhaps not quickly enough.

True, Delta may be restrained in how fast it can grow its core passenger revenue. But if it is a digital company first and foremost, large nontraditional revenue possibilities open up.

And grow smart. After being cautious last year, American, Delta and especially United Airlines are ramping up capacity expansion in 2018. This growth must be—as Parker and United president Scott Kirby argue it will be—value-adding to the carriers’ networks and not thoughtless expansion leading to damaging fare wars.

Aaron Karp/Aviation Daily aaron.karp@informa.com

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