Airlines Are For Traveling, Not Investing
Photo by Kevin Woblick on Unsplash.
Why owning shares of companies like Southwest and American Airlines is risky … at best
Airlines are an absolutely essential part of daily life for millions upon millions of people.
According to the FAA, more than 45,000 flights shuttle an estimated 2.9 million people across 29 million square miles of airspace … every … single … day.
That’s a lot.
Market participants love numbers like that. They might even be enough to convince some to take a deeper dive into the handful of publicly-traded airlines out there — companies like American Airlines and Southwest.
Demand like that certainly got me to take a closer look. Well, I almost took a closer look … then I remembered my golden rule: never invest in airlines.
Never Invest In Airlines
Despite seemingly endless demand, I can’t come up with a good reason to own shares of any of the airlines.
Sorry … I just can’t.
I still remember the conversations like they were yesterday. Pandemic fatigue was everywhere and people just wanted to get out of their homes. I don’t think anyone really cared where they went, either, they just wanted to stop staring at the same four walls. Naturally, airlines were lining up to help people find the change of scenery they were craving, and once the various governments gave them the green light, investors assumed, the pent up demand would lead to a surge of travelers.
They were right.
The airlines, once villainized (along with cruises) for spreading a sickness throughout the world, were being looked at as launching pads for people looking to escape their pandemic prisons after more than a year of sitting pat.
Demand surged.
Share prices, though … not so much.
American Airlines saw its share price sink from the $30 range in early February of 2020 right before the you know what hit the fan, to less than $10 by mid-May of that same year. Since then, though, guess what all the pent-up demand has led to?
American Airlines’ five-year chart.
The share price is down more than 55% over the last five years and, while demand certainly isn’t going anywhere anytime soon, the stock isn’t either.
The chart doesn't lie and, as you can see from zooming out, while the share price recovered a bit, those who own/owned the stock over the last handful of years might not.
It’s not just American Airlines, either … all the airlines, and even airline manufacturers like Boeing, have found the flight to recovery to be a turbulent one.
Essential Industry, Broken Stocks
If there’s an exception to the rules weighing down airlines in the U.S., Ryanair, the largest publicly-traded airline in the world (based on market cap), has had a strong run over the last five years, up more than 70%. Compare that to the returns of its top American counterparts — Delta Airlines is down 13% over the same period, Southwest is down nearly 40% and American is down almost 55% — and, well, there really is no comparison. Still, even if all the airlines were up 70% over the last five years, I’d still be hesitant to invest.
It’s just too risky.
Think about it … no matter how safe the planes are, something, eventually, will go wrong … and the market hates when things go wrong, even if they almost never do.
Of the 45,000 flights that circle our world daily, almost all of them reach their destination. In fact, the probability of an airplane going down is roughly 1 in 11 million, meaning the average traveler has a 0.00001% chance of something going terribly wrong on their flight.
Still, it happens.
Just last week Alaska Airlines Flight 1282 — a Boeing 737 MAX 9 — had a “plugged” emergency door fly off mid-flight, exposing passengers to open air. It ultimately landed safely with no fatalities (other than the phones, laptops and other lose personal items that were sucked out of the opening), but talk about a close call.
Boeing, which was trying to revive its image after a combined 346 people were killed in crashes involving its 737 MAX 8 in 2018 and 2019, now has a fresh round of questions to answer.
Shares of Boeing slipped more than 8% when the news broke earlier this week. All the major publicly-traded airlines saw their share prices take a dive, too, which is exactly why investing in these companies is a tough sell. Can you make money, sure, but you could also lose some or all of it on a random Wednesday. Anytime something goes even remotely wrong, it puts pressure on the entire industry. When tragedy strikes, regulators ground the planes and the cycle starts again.
As if that’s not enough to scare you away, who knows when the next pandemic might pop up … or war. In a world that’s becoming increasingly unstable, you can bank on the airlines and their balance sheets becoming just as unstable.
I’m not saying invest in a struggling retailer like Macy’s or gigantic tech company like Meta, either — they have their own set of risks (but at least they have more control over them) — I’m just saying stay away from the airlines.
Disclaimer: I’m a market participant, not a financial advisor. This is not financial advice.
