For most sectors, risky or not, you can find investors willing to roll the dice. Quick-changing technology, finicky natural gas, corrupt banks -- they all have their bulls at any given time. But one industry is largely abandoned, and for good reason. Warren Buffett said it best when he suggested that a forward-thinking capitalist should have shot down Orville Wright in 1903 for the sake of investors. But, believe it or not, there may be a diamond in the rough.
Let the losers consolidate
The major airline carriers are bloated beasts, going against the forces of nature and all that is holy to try to eke out a couple of bucks above breakeven quarter after quarter. It's like watching Bruce Willis try to convey emotion -- no matter how hard he tries, it just doesn't come together. Over the years, since the deregulation of airlines, it's been the M.O. for the major carriers to consolidate and dive in and out of bankruptcy.
Most recently, US Airways
US Air has been buoyed by attractive fuel prices and its position as the stable party in the US Air-American consolidation, but I see a storm ahead in its path.
Delta Air Lines'
For the major carriers to ultimately succeed, there needs to be a marriage of profitability and customer satisfaction -- the two need not be mutually exclusive.
I don't know when that will happen in such a brutal industry climate. For now, it seems the rule is "the more nimble, the better." Smaller airlines seem to create positive free cash flow while creating happy travelers. Compared with their bigger brethren, who are focusing solely on the most profitable routes and alienating consumers, these are much more attractive companies.
White knights on dark horses
Two U.S.-based airlines have a fighting chance, but to me there is only one with significant upside to warrant a piece of the college fund. I'm talking about Jet Blue
Jet Blue started out as a fare-based airline -- attracting customers on the premise of cheap seats. But what emerged from the discount model was interesting: Jet Blue became a premium airline with competitive pricing. Today it remains one of the most comfortable rides in the sky -- leather seats, great in-flight entertainment, free snacks, and more. Consumer opinion of airlines is constantly declining as the big shops charge us for everything from carry-ons to boarding passes. The airlines have historically been a commodity business, but I believe the model may be flipping. If a fare is $40 higher than another but doesn't include the nickel-and-diming, more travelers are going to pony up the extra cash.
Besides comfy seats, Jet Blue has other attractive features. The company's debt load is under control, and the stock is still off 57% from its 2002 IPO. At less than 8 times forward earnings, the company is more expensive than the major carriers, but it's because the market recognizes the ability for this company to turn a profit.
Jet Blue is expecting a big spike in maintenance fees this year, as its maintenance cycle is coming up for many of its planes purchased in the mid-2000s. That will hurt the bottom line to some degree, but view the pullback as an opportunity, because the following year will have dramatically lower expenses. I'm keeping an eye on free cash flow, improving corporate travel numbers, and more favorable fuel prices.
Southwest benefited for years from its effective fuel hedging, yet those benefits are winding down. If it can replicate its success, though, then this airline deserves a second look as well.
Airlines are a hard beast to love, and you may not think they're worth it. I'm fascinated by the industry and would love to see one of these picks emerge as a profitable airline -- something that is currently an oxymoron. Sound off in the comments. I want to hear your opinion.
Fool contributor Michael Lewis owns none of the stocks mentioned. You can follow him on Twitter, @mikeylewy. Motley Fool newsletter services have recommended buying shares of Southwest Airlines. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.