From Our Room With A View by Frank Jay

Steve and I were talking today about the current state of the aviation industry and some interesting circumstances were discussed.

Before I go into detail about our discussion, I don’t propose that either of us are qualified to formally analyze and forecast the direction of an airline from a financial standpoint, the airline’s stock value or direction, the airline industry’s value or direction, or the direction of the U.S. economy.  I say that even though Steve has a Bachelor’s Degree in Finance, an MBA with emphasis on Marketing, and a law degree (JD).  And I say that knowing that experts with extensive background in finance and securities have a horrible success rate on an extended basis when it comes to predicting the direction of stocks, industries, national economies, etc.

When we view our industry, we view it just as you do.  We view it as a participant and an interested party and we simply make assumptions and projections based on (43) years of industry experience on my part and (23) years of experience on Steve’s part.  We do gain a lot of information from our clients as we complete searches at all management levels with airlines, manufacturers, MRO’s, ground service companies, etc. and we do factor that information into our opinions…but we still see the future from the viewpoint of an active participant in our industry…not as a formal analyst.

The picture of our industry as we see it looks very good and it projects very positively into the future in our opinion.  No doubt, it really helps that oil prices have remained low keeping jet fuel prices low as well.  Seems like I remember one of the airlines saying back several years ago (when oil prices were above $100 a barrel) that the industry could make a profit with oil at $90 a barrel…and now we have oil prices at half that amount.  And even though airline capacity has to be rising, it doesn’t appear to be out of control as it did several years back.  And, the U.S. economy continues to show strength.  Those three factors should help our industry to remain profitable for the near future.

What we were discussing today were industry circumstances that have yet to occur but we expect to occur prior to a decline in the health of the aviation industry.  Those circumstances are:

  1. Pronounced growth in the regional airline industry.
  2. Sizable increase in new entrants to the industry in general.
  3. Increased number of airline IPO’s.
  4. Major airline stock prices (United, American, Delta) in the $90-120 range.

Regarding point #1, the regional airline industry was decimated after 9/11 and continued to be in severe disarray until just a few years ago.  After 9/11, the major airlines changed up their code share contracts with their regional affiliates to reduce costs.  Consequently, regional airlines were hurt badly.  In 2008, with the United States in recession, regional airlines were damaged further.  They didn’t really begin to recover from these two circumstances until around 2014 and they are only now showing signs of strengthening from a profit/revenue standpoint.

We think this situation is now changing and that regional airlines will begin to increase their profitability/revenue and grow for an extended period of at least several years.

Regarding point #2, there have been a few new entrants into related parts of the airline industry such as membership airlines and charter airlines.  But, there have been almost no new entrants to the main part of the airline industry.  There have been no new ultra low cost carriers, no low cost carriers, etc.  In times past, as the airline industry increased its profitability, there were always new entrants in all parts of the industry.  Maybe things have changed so dramatically that new entrants simply cannot compete, but that doesn’t seem logical.  It stands to reason…at least to us…that there will be new entrants as the industry continues to remain healthy and increase in profitability.  We think a dramatic increase in new entrants will occur and will occur (as it has before) prior to a downturn in the industry fortunes.

Regarding point #3, we know of a few airlines that have been waiting (not so patiently) to go public.  We think their patience is about to be rewarded as the airline industry’s financial health continues to increase.  We also think additional airline startups will offer other opportunities for airline IPO’s.

Regarding point #4, we think that you have just seen the start of a strong rise in the stock prices of the major airlines.  We think they will rise beyond $100 per share soon…probably next year or the year after at the latest.  American, United, Delta and Southwest have finally done an outstanding job of controlling capacity and controlling costs…and they have received a huge windfall as oil/fuel prices have stayed so low.  We think their reward is just around the corner and that they will rake in the profits.

We think all of these four circumstances will occur before the direction of the airline industry changes.  That means hopefully that we have a few good years going forward before the wind blows in a different way.  Our plan is to work with this opportunity and be prepared when a change finally comes.