FOOL ON THE HILL

Fly the Sordid Skies

The airlines have been in the news a lot recently: bankruptcies (both real and threatened), continued security problems, costly new policies, and congressional hearings on more aid. Most of the major carriers are now penny stocks. If the market is saying anything, it's this: Airlines stink. I couldn't agree more.

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By Robert Brokamp (TMF Bro)
October 10, 2002

Yesterday was another study in turbulence for airline stocks. The Amex Airline Index fell to its lowest point ever. American Airlines' parent AMR (NYSE: AMR) touched a 20-year intraday low, and  Delta Air Lines (NYSE: DAL) is trading at levels not seen since the Nixon administration.

I don't revel in the misfortunes of any average investor; I know all too well the sting of capital misappropriated. However, if there's an industry for which I have antipathy, it is the airlines.

(Disclaimer: I'm going to make multiple sweeping generalizations in this article. However, I hereby acknowledge the existence of exceptions -- most notably, Southwest Airlines (NYSE: LUV).)

What is it about the fliers of the friendly skies that makes me feel so unfriendly? Let me count the ways.

They're lousy investments
A picture's worth a thousand words, so check out this chart displaying the 10-year performances of the stocks of Delta, Southwest, American, Continental Airlines (NYSE: CAL), America West (NYSE: AWA), Northwest Airlines (Nasdaq: NWAC), United Airlines' parent UAL (NYSE: UAL), and the recently bankrupt U.S. Airways Group (which trades on the OTCBB under the symbol UAWGQ, getting no R-E-S-P-E-C-T).

Folks, that's not a stock chart; it's an autopsy photo -- one which, it could be added, displays a body missing several limbs, namely Pan Am, Piedmont, People's Express, and Braniff, among others.

In a recent issue of Newsweek, Allan Sloan wrote: "For more than 60 years, airlines have been an up-and-down business, so to speak. They make money for a while, then suffer losses because of overexpansion, excessive debt, and high labor costs. In fact, the industry had a cumulative $4.9 billion loss from 1938 through 1994, before embarking on a winning streak that would have probably ended even without 9/11."

Put more bluntly, Warren Buffett said in 1999, "Sizing things up, I like to think that if I'd been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public spirited enough -- I owed this to future capitalists -- to shoot him down. I mean, Karl Marx couldn't have done as much damage to capitalists as Orville did."

They're on the taxpayer dole
After Sept. 11 and the dropoff in air travel, Congress gave the airlines $5 billion and another $10 billion in guaranteed loans. And now they're back at the government trough. In recent hearings before Congress, the CEOs of the major airlines testified that increased security measures and declining traffic necessitate another government handout.

Generally, I'm fine with my tax money being used to assist those harmed by terrorist attacks. But let's be clear: The airlines weren't in great shape before Sept. 11. A review of this chart shows that all but one of the stocks of the major airlines posted a negative return from Oct. 2000 to right before Sept. 11 (the point in the middle of the chart where the returns drop precipitously).

Furthermore, the events of that day were the result of a security failure. And who was in charge of security? The airlines. Back then, they were in charge of the airport screeners, though they generally contracted out the responsibility. And we've all heard about the quality of this screening. The now-notorious Argenbright Security was criticized by American and other airlines for not providing adequate security in the Philadelphia airport from 1995 to 1999. A federal court fined the security company $1.2 million, yet American still retained Argenbright's services.

What was the airlines' punishment for shoddy security? The government took it over, relieving them of the financial and administrative burden, and passing the costs along to the taxpayers.

Could Sept. 11 have been prevented had the airlines provided tighter security? Who knows. Small knives were legal on airplanes back then. That said, airlines have a long and sordid history of blocking federal attempts to enhance airport security. How can the airlines thwart Uncle Sam? It's easy for them, because...

They lobby vigorously
According to political watchdog Common Cause, from 1997 to 2000 the nine biggest airlines, along with their trade group, spent $63 million on such lobbyists as former Federal Aviation Administration official Linda Daschle (wife of Senate Majority Leader Tom Daschle) and former Sens. Dale Bumpers, Wendell Ford, and Bob Packwood. (Bob Packwood!)

You can guess what they lobby for -- more money. But what do they lobby against? Increased security.

As explained in many publications after Sept. 11 (such as this Boston Globe article), a commission led by then-Vice President Al Gore proposed many ways to make air travel safer after the 1996 explosion of TWA flight 800. However, the Gore Commission backed down from many of its original proposals after heavy lobbying from the airlines -- and $585,000 in donations to the Democratic Party. (As an aside, isn't it macabre to call a study of life-saving measures the Gore Commission?)

This past January, the airlines sponsored the 2002 Aviation Issues Conference at the lush Hapua Beach Prince Hotel in Kona, Hawaii. Eight members of Congress and several aides attended. So, to make sure we have this right: An industry that needs government charity can afford to pay for lavish junkets. Does anyone else see something wrong here? (Of course, since the airlines seem to get what they want, you could argue that money spent on lobbying is money well spent. If so, it says a lot about our system when, instead of cutting costs, a struggling industry would be better off hiring former congressmen.)

They pay their pilots and executives too much
Now we come to the classics: pilot pay and executive compensation. The average salary for a fifth-year first officer is $97,572, according to Aviation Information Services. For tenth-year captains, the average salary is $148,956. When asked in an interview to justify salaries in excess of $400,000, President of the Air Line Pilots Association Duane Woerth said, "If you can bargain for it, you should get it."

There are plenty of arguments for the lofty compensation. Pilots have to go through extensive training, spend a lot of time away from their families, and are responsible for hundreds of lives. But compensation is rarely a question of who deserves it; do teachers, policemen, and firefighters get paid what they deserve? Regarding pilot pay, it's a question of whether this industry can afford it  -- and whether taxpayers should subsidize it.

Pilots make peanuts, however, compared to the money pulled in by upper management. Why should the leaders of such money-losing, panhandling businesses be compensated with hundreds of thousands to millions of dollars? Here's a proposal: No one at a company that gets bailed out by taxpayers can earn more than $100,000. Of course, the folks in Congress would never do it; they'd be alienating a future source of income.

Finally, we must ask whether some airlines can make it at all. To answer that question, we must return to Southwest. As pointed out in yesterday's Wall Street Journal, the other airlines would have to, as a group, cut their costs by 29% ($18.6 billion) to achieve Southwest's efficiency. The company has been profitable for 29 consecutive years, and the only airline to make money in the past 18 months.

My personal interaction with employees indicates that they're willing to accept below-average compensation in order to work for a great company. Think of that: Job satisfaction and company pride are just as important as money. What a concept.

Robert Brokamp owns the companies mentioned in this article to the extent that they're part of the S&P 500 index funds, in which he invests. The Motley Fool is investors writing for investors.