Look out for the next British Invasion, JetBlue (NASDAQ:JBLU), Southwest (NYSE:LUV), and AirTran Holdings (NYSE:AAI). It will be a lot more threatening than The Beatles, Carnaby Street, punk, or Tony Blair, and just may eat your lunch. (Er, imaginary lunch, since you don't serve any.)
Sir Richard Branson, founder of the Virgin Group that includes Virgin Atlantic Airways, announced that he will start a U.S. airline to compete in the discount arena by the first half of 2004. U.S. law restricts foreign ownership of domestic airlines to no more than 49%, so Branson will need a U.S. partner.
Virgin runs discount airlines in Australia and Europe and flies to a number of far-flung cities from London's Gatwick airport. Recently rebuffed in its effort to keep the Concorde service alive, Virgin has introduced the Upper Class Suite to attract passengers with the money to have flown the supersonic transport. The Suite will have leather seats that recline to flat beds -- attractive for long-haul flights.
U.S. discount airlines have come and gone (remember People's Distress, I mean Express?), but more so since Alfred Kahn and the Carter administration began to deregulate U.S. air travel. Each entrant finds a bright, committed staff eager to start a new enterprise and wear shorts (which I am wearing right now at my desk at Fool HQ), often with significant stock ownership to compensate for lower wages than the majors are paying. They frequently start in low-interest-rate (and therefore cheaper plane financing), low-fuel-price, and lower-wage-environments.
But sooner or later these advantages change or even disappear. News reports reveal that Southwest employees are increasingly restless, dissatisfied with a languishing stock that makes higher wages preferable. Any increase in personnel costs, along with negative swings in financing or fuel costs, and an airline is back in the plain old life cycle of the industry that weighs down and bankrupts carriers during inevitable slowdowns.
However, between an airline's birth and death, investors may profit. Southwest has created a lot of wealth for long-term shareholders, and others such as JetBlue may yet as well. Whitney Tilson has showcased the very positive aspects of its business today (and you can share your opinion on our JetBlue discussion board). And even the majors' stocks can be cyclical economic bets for those with the expertise and risk tolerance.
For my part, last fall I made the case for shorting JetBlue before it dropped 30%. It has since rebounded. But I'll stick with the advice of Warren Buffett, who after his own bad experience investing in airlines reportedly told a group of business students that "I now have this 800 [telephone] number, and if I ever get the urge to buy an airline stock I dial this number. And I say my name is Warren, and I'm an 'air-o-holic,' and then this guy talks me down on the other end [of the line]."
And with Virgin en route, that may just be the ticket.
Get financial roadside assistance today with a free trial to TMF Money Advisor!
The Motley Fool's Take picks the top investing stories and gives you a viewpoint you won't see anywhere else. It's our special antidote to mainstream financial media combat fatigue.
