Airline Stocks Downgraded – Analysts don’t get it?

Airline stocks downgraded by one analyst at Raymond James and they all tumble? American Airlines (NASDAQ: AAL) dropped over two dollars in just three hours. Delta Airlines (NYSE: DAL), dropped over 4% as well. United Airlines, is joining right in.

AAL
American Airlines Downgraded and Flying High.

All of this started a couple of weeks ago when Southwest Airlines (NYSE: LUV) announced extremely low Summer fares. American Airlines followed suit and at the same time oil prices climbed just above $60 a barrel.  All four of the big players have had a slow gently slide since.  Today they dropped all because one person decided to downgrade the stocks?

 

What the big analysts are missing is that Southwest Airlines advertises ultra low fares every summer travel season. This is nothing new. The big problem is analysts are always looking at next week, or  next month and maybe stretching to see to the end of this quarter. They don’t look at the big picture. And that’s why the airline stock prices all over the board.  Simply put, the big analysts are only looking at today. I don’t care what they tell you about future growth they aren’t looking past 90 days.

 

Several years ago Unilever chairman Paul Polman stopped giving quarterly guidance to the stock market because he realized how ridiculous analysts are. Maybe it’s time the airlines do the same thing.

 

The reality is that oil is still very cheap, and the major airlines have huge opportunities in front of them. Think about what airlines do. They take people long distances in a short period of time. If you look at the entertainment industry stocks such as Disney (NYSE: DIS), you will see that sales are up. And I’m not talking about movies, the theme parks are setting record profit numbers. Vacation travel is already showing signs of a very strong summer.

 

You can advertise super low fares all day long when your planes are already 50% full because you will never have to actually sell any of those tickets. It’s simple marketing, period.  Most of the Airlines are still recording record load factors well north of 85%.  When has Wal-Mart ever been downgraded for advertising a loss leader with very limited quantities on Black Friday?  This isn’t any different.

 

The next big problem for the airlines is the pilot shortage. Sorry Raymond James, but the airlines have no choice but to maintain capacity discipline simply because they can’t get enough pilots.  In February 2014 regional carrier Republic Airlines warned investors it would have to start parking airplanes due to a pilot shortage. Skywest followed suit just months later. Those are the pilots the major carriers like American Airlines, Delta and United need since the military pilot pipeline has shrunk 80% since Vietnam era period

 

Japan just extended the mandatory retirement age of pilots two years, making the mandatory retirement age now 67. The reality is more than half of the pilots we’ll not make it to that age due to the health requirements for flying jets. Pilots get a physical every six months in order to make sure they are “fit to fly”.  And with upcoming additional psychological screening it is expected more pilots will not make it all the way to 67.

 

This provides the airlines and opportunity to compete beyond cost because of the limited Number of seats available. The airlines have push the pilots to the absolute limit in terms of retirement age the number of hours work each month. They are now out of options.  If the genius at Raymond James downgraded Boeing, Airbus, Canadair and Embraer that would make a bit of sense.

 

Yes pilot pay has finally gone up, however it has not gone up enough to entice college students to pay nearly $100,000 in order to get the licenses required to fly for a major airline. So in the interim the airlines have an opportunity to raise prices. Therefore increasing profitability.  All of the majors have their pilot pay locked for the next few years, so there is no risk of higher rates on the horizon.

 

American airlines CEO Doug Parker is clearly aware of this opportunity since he shifted his entire compensation package to stock recently. When it takes the same amount of time for a college graduate to finish medical school as it does to earn the licenses necessary to fly for airline, you don’t have to be a genius to understand the next five years are going to be very different for the airline business.

 

The problem is the airlines are looking five years down the road, But the analysts are only looking at next quarter.  This makes for a price chart that looks more like a ekg with myocardial infarction.

 

With all three of the major airline stocks down nearly 10% from last quarters highs, this is looking like a very good time to buy and hold for a year or so. Maybe even five years.

 

Eric James is a freelance writer and financial advisor.

 

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