Until last year, US airlines stocks were flying high, having gained 264% in the past 5 years (from Jan 1st 2010 through December 31st, 2014). In fact US airlines was the best performing sector gaining 105% more than the S&P which rose 159% during the same period. In 2015 however, the airline stocks reversed course losing 18%, as of June 17, 2015.
We examined the underlying causes for the change in sentiment and outlook to determine whether the market has it right and these are stocks to be avoided, or whether the reaction to airline management decisions to add capacity is an over-reaction that masks improved fundamentals.
It’s important to provide some historical context. For decades, since deregulation, airline stocks have been a lousy investment. The industry was fraught with too many players, demanding unions, unstable fuel costs, and executives who lacked fiscal discipline. This combination engendered a “boom and bust” cycle that was ruinous for long-term investors.
So what changed to drive the airlines to new heights in the past five years? To put it simply: Consolidation, bankruptcy and capacity rationalization.