Getting your bearings
The global airline industry is large and complex, offering opportunity for informed investors. The largest U.S. carriers are Delta Air Lines (DAL), United Continental (UAL), American Airlines (AAL), and Southwest Airlines (LUV). There are no airline-specific exchange traded funds, but they are included in the transportation exchange traded funds, including IYT.
The graph above shows the indexed return of the S&P 500 exchange traded fund (SPY), the iShares transportation exchange-traded fund (IYT), and the average price of the publicly traded passenger airline companies that didn’t enter bankruptcy over the period. The returns are indexed from May 2009 at 100. So, while SPY and IYT are up over 200% over the past five years, Delta is up over 600%. Let’s take a look into this industry that rewarded investors so well recently.
Change and more change
The industry changed over the past ten years, with consolidation of the major players and the rise of the low-cost and regional players. The major players consolidated in the U.S., as Delta (DAL) combined with Northwest while American Airlines (AAL) combined with US Airways, America West, and Trans World. United Airlines (UAL) combined with Continental. The large carriers with hubs and spokes and international flights are the mainline or full-service carriers or network carriers.
The rise of low-cost carriers
In 2013 U.S. low-cost or regional airline revenue exceeded the network carriers on domestic flights, according to a recent report by Oliver Wyman. These include both the low-cost airlines and the regional airlines. The low-cost airlines typically run between two popular markets that would often take a transfer on the network carriers. For example, Allegiant flies from Grand Rapids, Michigan, to Fort Lauderdale, Las Vegas, Orlando, Phoenix, and Tampa Bay. It’s a niche, but with smaller airplanes and more bargaining power over employee contracts and smaller airports, it can make a profitable business out of it.
The regional airline companies tend to service smaller airports and are often under contract with the network carriers to feed into the larger carrier networks. This allows network carriers to scoop travelers into their network systems while paying less than if they were flying the route. The network carriers tend to have higher costs. We’ll look at this in a moment, but first we need to cover a couple industry terms.