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Should the Stock Market Back Airlines?

1 August 2007 - Features - Editor

Stock market investors and company executives may be at logger heads on a number of issues, but one matter on which they are mostly on the same side of the fence, is with respect to airlines. Virtually everyone travels, both on business, as well as to vacation destinations. Then there is the advertising, and the loyalty programs. Airlines enjoy high brand recall, even if in a negative sense because of delays, poor service, or lost baggage.

The high capital requirements force all major airlines to be substantially stock market dependant. The love affair is one-sided for most of the time, because the industry is notoriously fickle when it comes to reporting profits and declaring dividends. The long gestation period in acquiring new capacity and the most efficient technology, means that short-term surges in demand are mostly lost opportunities.

Stock market opinion is mostly divided between backing aggressive demand projections from emerging countries, and pessimism about the capabilities of the sector to withstand constant turbulence over operating costs. Pressures to deal with harmful emissions do not help either. The industry certainly goes through drastic cycles of upswings and downturns. Does it really deserve stock market support?

The truth is that not all airlines are the same. Some of the largest ones have lost dynamism, and have unproductive and recalcitrant employees. Most of the ones in Europe and in India have become to surviving on dollops of support from home country governments. However, some of the newer ones have made profitable niches and have interesting prospects.

Vacations will not go away any time soon, not even for the most hard-working stock market types! Therefore, airlines with strong Internet distribution, alliances with tour operators, and schedules from major world cities to holiday destinations, are bound to do well. Much of the business class segment could shrink as business people take to video conferencing, and as their employers become increasingly cost conscious. There will always be the rich and famous that use First Class services. Access to low-cost funds is another differentiator, as successful airlines have to keep upgrading their hardware.

Overall, the airline industry is not unlike any of the others that clamor for stock market attention. Wise investor will pick top ones and discard the others, without any bias for or against the sector as a whole.

 


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