Sell the Airlines We Love to Hate
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Few industries inspire the near-hatred as do the majority of major airlines. For most of us, this is the result of a bad personal experience while traveling – a lost bag, cancelled flight or the terrible customer service that symbolizes air travel – but in other cases, it is because airline stocks regularly find new ways to alienate customers and investors. From United Continental Holdings (NYSE: UAL) to the once-beloved Southwest Airlines (NYSE: LUV), these companies and their stocks continue to find new ways to disappoint. While airline stocks can be useful near-term trading vehicles, they should not be included in one’s core portfolio, unless they are added as shorts.
More Customer Disservice
Frontier Airlines recently became the latest in a long line of air carriers that is squabbling with online travel agencies and providing large disincentives to customers to shop for tickets anywhere but directly on the carrier’s website. The source of this tension is the commission that companies like Expedia (NASDAQ: EXPE) charge the airlines when a ticket is booked through them. Booking fees cut into the airlines’ profits and are responsible for larger scale prices wars than ever existed prior to the online revolution. The airlines claim that travel sites only differentiate by price, failing to highlight many other important features that each airline may offer directly.
Frontier is taking extreme measures to counteract the impact of bookings outside its website. Travelers who opt to book through a third party will not be given seat assignments until check-in, will be charged higher fees and will be awarded only half as many frequent flier miles. A senior VP at Frontier, Daniel Shurz, stated : "There is no logical reason for our customers to want to book anywhere else." Unfortunately, with a consumer base that values choice as much as Americans do, there may be no logical reason to book with Frontier at all.
Southwest was the original rabble-rouser in this arena, opting to only cater to its clients directly through venues it could completely control. This was an acceptable approach when Southwest was the low cost, high service option, and when it was the only oddity. Since American went several rounds with Expedia in 2010, there has been an increasing tension between the airlines and the major travel sites.
Typically Out of Touch
What the above dispute and developments underline is how out of touch the airlines are with their customers. While there is a cost savings to be had by switching to the direct-booking-only approach, it creates inconvenience for travelers from companies that seem to exist for no other purpose. Flying used to be a privilege and an occasion that non-business travelers looked forward to. It has become a means to get from point A to point B if there is simply no other viable option. Rather than looking for ways to entice consumers to use their services, airlines have become merely tolerated for when you really need them.
The Investment Angle
While consolidation has allowed the airlines to keep fares relatively high and thus led to reasonable recent-term performance, I remain unconvinced. Of the large majors, Delta Air Lines (NYSE: DAL) has the most attractive valuation at 8.5 relative to 20.6 for Southwest and 16.9 for United. Delta also scores highest in customer service amongst the big three, but Southwest continues to be a traveler favorite. Other factors in Southwest’s favor are the general fuel efficiency of its fleet and the company’s success in hedging fuel costs.
The above factors have allowed Southwest to outperform its peers over the last three months, but as the company continues to mature, it faces many of the problems impacting the others. If one absolutely feels compelled to own an airline stock, Southwest may be the best overall choice, but these are all names to avoid. Despite increasing pricing power, airlines remain a questionable investment.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.