Dear Mr. Berko: I bought 200 shares of United Continental Holdings last year at $76, and I’ve been behind the eight ball since. My broker wants me to keep the stock. I’m disappointed with it and inclined to sell. What is your thinking on this stock?
— T.L., Detroit
Dear T.L.: Sell it! Except for some special TWA bonds that were secured by physical assets, I’ve never recommended an airline stock. Airlines haven’t been on my goodwill list since the late 1980s, when I listened to a group of airline executives use the term “cattle count” in reference to the number of passengers they carried. Now United’s red-eye flights turn out to be black-eye flights.
Airlines have never been good long-term investments. It appears that the industry reached its profit peak in 2016 and is on the decline — again! Though strong travel demand may generate a minor tail wind this year, the people in management at most carriers appear congenitally unable to keep operating costs down. And as inutile management flounders in its cost-control efforts, slumping passenger yields will force margins lower, and some of the weaker carriers may be forced to recapitalize — again! Meanwhile, the industry’s infantile efforts to control costs have led to sneaky increases in revenues (nonticket items), which airlines use to mitigate their cost-control failures. Last year, additional revenues from charges for luggage (which is often abusive), advance seating reservations, pay-per-view entertainment, internet usage, changing flights, special ticketing, additional legroom, refund penalties, etc., exceeded $66 billion globally. And last year, United Continental’s (UAL-$68) $5.7 billion in ancillary revenues totaled $41 per passenger and were 15 percent of the carrier’s $38 billion in gross revenues. Wow!
The following is a quote from Warren Buffett’s 2002 interview with The Telegraph, one of the U.K.’s largest newspapers: “If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in. You’ve got huge fixed costs. You’ve got strong labor unions. And you’ve got commodity pricing. That is not a great recipe for success. I have an 800 number now that I call if I get the urge to buy an airline stock. I call at 2 in the morning and I say: ‘My name is Warren, and I’m an aeroholic.’ And then they talk me down.”
