🔬Should You Invest In Airlines (or just set your money on fire)?

Jul 12, 2024

"In God we trust; all others bring data"
- Michael Bloomberg

"There are two times in a man's life when he should not speculate: when he can't afford it and when he can"
- Mark Twain

Super short one today as I’m feeling under the weather. Back to regularly scheduled programming on Monday!

Street Stories

Airlines: The Capital Incinerators

One thing that stuck out to me while writing my ‘Wall Street Stats’ article yesterday was just how bad the airlines are.

Weak growth, terrible profitability and mountains of debt. Think of today as the opposite of a highlight reel on the beleaguered airline industry. Here we go! Wooosh!

To start with, the returns have been terrible. Utterly terrible. The only one with a positive return over the past five years has been regional player SkyWest. But even then, it’s managed less than half the return of the S&P.

‘But that’s just the shares,’ you say. ‘It doesn’t count dividends,’ you say.

Fair. But all of the majors actually slashed their divies to zero during the pandemic and only Southwest has actually resumed something that could be considered a relevant dividend.

(If you are holding onto Delta just for that juicy 0.64% dividend yield, this newsletter might not be for you).

On the revenue front, you can see how badly the airlines took it on the chin. Each saw 2020 revenue drop >50%. Yucky.

The big four have all now caught back up to their pre-pandemic revenue levels, and Wall Street is actually forecasting a decent amount of growth for the space.

That said, earnings are nowhere near as pretty!

None of the Bigs have been able to get profitability back to 2019 levels.

Delta and United are in the best shape here, with Wall Street expecting their fiscal 2025 to finally breach 2019 levels but Southwest and American still have many years left to reach that feat.

Part of that reduced profitability is the fault of inflation - general economic but notably wages and fuel costs. However, a lot of that has to do with massive increases to airline debt loads.

Running a low margin, high fixed cost business isn’t typically great. But when a pandemic hits and cuts your revenues in half, then it’s extra bad.

In the fallout of the pandemic, only American didn’t end up more than doubling their total debt.

Weak profitability and super high debt. That gets you a first class ticket to the investment dumpster.

SkyWest is probably the best company of the lot and trades at a premium to its peers in the mid-single digit range.

The only exception is Southwest, but don’t get your hopes up. That P/E is artificially high do to some weird operational issues in FY2024 causing earnings taking a brief fiscal nosedive (see ‘Earnings Per Share Growth’ above).

While scathing, this was just a high level view. Getting into the weeds on these companies doesn’t yield some bright, shiny turn-around story either. Just more meager growth, debt related austerity, and a timebomb waiting for the next labor strike, price war or oil shock.

Be it activist hedge fund Elliot Management taking a stake in Southwest and threatening to fire all of the C-suite. Overcapacity following the post-Covid boom. Or JetBlue persistently trying to sell itself as bankrupts’ looms. The sector may not make the best investment, but it sure is always topical.

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Joke Of The Day

A positive attitude may not solve all your problems, but it will annoy enough people to make it worth the effort.

Trivia

Today’s is on Nvidia Founder and CEO Jensen Huang.

What is Jensen Huang’s net worth?
A) $8.8 billion
B) $281 billion
C) $29 billion
D)$62 billion
At 30 years old Jensen founded Nvidia with his buddies. What year was this?
A) 1993
B) 1998
C) 1988
D) 1984
Prior to founding Nvidia, Jensen worked at which rival?
A) AMD
B) Intel
C) Global Foundries
D) Applied Materials
Steve Jobs had his black turtlenecks, but Jensen’s look for public engagements includes what?
A) Sunglasses
B) A monocle
C) Cardigans
D) Leather biker jacket

(answers at bottom)

Trivia Answers

D) Jensen is worth around $62 billion.
A) Nvidia was founded in 1993.
A) Jensen worked at GPU competitor AMD.
D) Jensen can always been seen in a leather biker jacket.

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