Is There Finally Money to Be Made in Airline Stocks?

Andrew Tonner: Hey Fools, Andrew Tonner here. I'm joined today by Fool.com analyst, Brendan Byrnes.

Brendan, let's take a look at the industrials sector, specifically the airline sector. It's a brutal place for investors to usually make money, but we've actually seen some huge activity -- a resurgence of merger activity -- recently.

The big announcement was the merger between US Airways (NYSE: LCC  ) and American (UNKNOWN: AAMRQ.DL  ) . What are your thoughts on that, especially for the industry going forward, and this merger specifically? Is it going to help these companies? Hurt them? What are your thoughts?

Brendan Byrnes: It's kind of a long time coming for this merger. You felt that this was a likely outcome for a while, and the stock price of US Airways certainly reflected that -- up about 3X since their low at the end of 2011.

When you look at this merger, I think it makes sense. I actually think this merger helps US Airways a little bit more than it helps American. US Airways is smaller, they get access to more international routes. But it makes sense, overall.

About 72% of the company will go to creditors, 28% will go to US Airways shareholders. When you're talking about these things, the easy part is getting the deal done, even though that's not the easy part. The really tough part is integrating these two big airlines.

We saw they had some trouble with United/Continental (NYSE: UAL  ) , Delta/Northwest (NYSE: DAL  ) , Southwest (NYSE: LUV  ) and Air Tran; a smaller purchase there, but even maybe even some issues there. There are all sorts of issues you have to work through. The reservation systems, getting those combined together; the pilots, the seniority list can be a big issue as well.

Overall, keep an eye on this. If you're an airline investor this is something to watch. I don't anticipate any regulatory issues here. Some people mentioned maybe LaGuardia or Washington Reagan might have to give up some spots. We'll have to wait and see on that, but not a huge material impact there.

Doug Parker is going to head this combined company; the CEO of US Airways will be the head of the combined company. I like that. I think he's a great CEO overall, but I'm still just not confident in the airline industry. It has such structural flaws.

We're talking about 30%-40% of operating costs go into jet fuel. There's so much out of these CEO hands. Even a great CEO like Doug Parker, there's only a limited amount that he can ultimately do as far as differentiating yourself from the other airlines, especially when you have Southwest, JetBlue, Spirit Air coming in and trying to undercut you on price.

You combine union pressures, high fixed costs, a ton of legacy issues; overall stay away from airlines as a long-term investor. I prefer to leave this to the short-term guys. I like to buy and hold for three to five years at least.

I'm just not confident that one of these airlines can differentiate themselves enough, number one, and number two there are so many outside influences that these airlines don't have control over, so I choose to stay away.

When you add up the annual profits of airlines over the past 50 or so years they're negative, and it's that way for a reason. It's a structurally flawed industry. This is good in the way of consolidation. Now three big legacy airlines, you still have the smaller players of course, but at the same time keep this one for the short-term guys.

Buy great businesses with competitive advantages, big moats; I just don't see that here.

Andrew: Yeah. It's so tempting when you see some of these stocks appreciate so quickly, in such a short amount of time, but at the same time it's so risky. Why put your hard-earned savings toward it? I think you're completely right.

Brendan, thanks for your insight. Thanks for watching, folks, and we'll see you at Fool.com.

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