Airline Stocks Are Flying High Now but Won't Forever

NEW YORK - JANUARY 12: Airbus A330 approaches at dusk to JFK Airport located in New York, USA on January 12, 2012. Delta is one
Chris Parypa Photography/Shutterstock
Investors are starting to embrace airline stocks again. American Airlines Group (AAL), United Continental (UAL) and Delta Air Lines (DAL) are up 60 percent, 23 percen, and 39 percent, respectively, so far in 2014. All three of the legacy carriers have seen their shares more than double off of last year's lows.

Last week we even saw American Airlines do something that the iconic airline hasn't done in 34 years when it reinstated the quarterly dividend that it suspended in 1980. It's also not the only way that these air heads are returning money to their stakeholders. The boards at American Airlines and United Continental authorized $1 billion in buybacks.

Ascending stocks prices, mailing out dividend checks and cranking out the kind of free cash flow to accommodate 10-figure stock repurchases are as unusual as a flight out of O'Hare or LaGuardia leaving on time. The airline industry is starting to take off, but you may want to respect that "fasten your seatbelt" light.

Cleared for Takeoff

With sector consolidation and modest jet fuel rates helping improve margins, air carriers have been big winners in 2014. And the good times are expected to continue in the near term. Analysts see earnings per share soaring 93 percent at American Airlines this year. It will earn more this year than the carrier's market cap was in early 2012.

It's not the only one expected to make big strides. United Continental's profitability is expected to climb 56 percent this year. Delta isn't growing its bottom line as quickly, but there's always the possibility that analysts aren't aiming high enough here. Over the past year the three leading carriers have combined to beat Wall Street income estimates in 10 of the 12 quarters.

If this was any other sector, flourishing in an ideal climate with mergers making the remaining players even stronger would be the feel-good story of 2014. Unfortunately we're talking about airlines, and we've seen these highs come undone by turbulence before.

Making Our Descent

"Investors have poured their money into airlines and airline manufacturers for 100 years with terrible results," Warren Buffett, arguably this generation's greatest investor, said in 2013. "It's been a death trap for investors."

Buffett was asked about the airlines after merger activity and share prices began to pick up. He was probably being kind. A dozen years ago he had a more vivid reaction: "If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright," he reportedly said at the time. "He would have saved his progeny money."

Buffett's argument then was that the industry's high fixed costs, strong labor unions and commodity pricing made it a dangerous area to invest. He should know. He bought some US Air debt in 1989 and was lucky to get out a couple of years later without losing his hide.

Pressures From Consumers, Competitors, Unions

Buffett's concerns are still valid today. Despite the popularity of frequent flyer programs, we're still using online sites to make sure that we grab the cheapest fare on any carrier. This will always be a business where desperate carriers will launch price wars. Sector consolidation helps, but this won't change, because this will never be a monopoly.

We're years removed from the latest organized labor strikes, but unions are working to keep employees well paid regardless of the ups and downs of fuel costs and passenger demand. All of this adds up to planes that need to operate at high occupancy levels to remain consistently successful. It has happened over stretches of time.

Airlines are clearly successful right now. However, there's a reason why Buffett has said that the industry has "eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in."

It could be happening again.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

9 Hotel Scams and Annoying Fees to Watch Out for
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Airline Stocks Are Flying High Now but Won't Forever
After you check in, the room phone rings, allegedly from the front desk. There's a problem with your credit card, the operator says, please give me the account numbers again. To pull it off, all a criminal has to do is trick their way through a hotel switchboard and catch a patron in the room. If you get a call like this, hang up, call the operator, and ask if there's a problem. That's a good habit at home, too. Hang up and call back. If there's really a problem, don't reveal your number over the phone. Just walk back to the front desk.
"You find a pizza delivery flyer slipped under your hotel door," the FTC says. "You call to order, and they take your credit card number over the phone. But the flyer is a fake, and a scammer now has your info." I've not seen widespread incidence of this. it would be pretty brazen for ID thieves to physically walk around hotel hallways, where cameras might be used to identify them. Still, the same principal applies. Use a smartphone to double-check the phone number you see on any flyer placed in your room before you order pizza.
The single easiest way for a hacker to hijack your computer is to set up a rogue hot spot and trick you into connecting to it. "Oh, free WiFi," you think. While that's a very real problem, it's also not terribly likely in a hotel room. After all, to be close enough to pull it off, the criminal's technology would in most cases have to be inside the hotel. That's a risky proposition. On the other hand, you might be visiting a lot of strange coffee shops on the road, where rogue Wi-Fi is a more likely possibility. It's always smart to double-check the safety of the networks you connect to, however. It might be wise to stick with your smartphone's connectivity, if that's possible.
The more expensive the hotel, the more likely you will be charged a hefty Wi-Fi fee of $10-$15 per day. The new trick I've seen lately is for hotels to offer "free" Wi-Fi in the lobby but charge for access in the room. Best way to avoid that fee? Before you leave, make sure you know how to use your smartphone for broadband access.
Hotels have a love-hate relationship with websites like Priceline (PCLN) or Expedia, which help them fill rooms,but systematically put downward price pressure on their inventory. Extra fees, added at check-in, are the hotels' way around this problem. Many folks pay online, only to find there's additional charges when they arrive at the hotel. Resort fees are often the biggest culprit. As the name suggests, this fee is most prevalent in restort-y places like Las Vegas. 
Hotels like charging to clean your room now, as if that's not included in the price. The worst part of the housekeeping fee: Often, housekeepers don't get any of the money.
More hotels are embracing travelers with pets, and they're charge $10 to $100 for allowing a pet in your room. If you use a site like Expedia to sort through pet-friendly hotels, make sure you manually check the fee. Not all pet-friendly hotels are created equal.
This one bugs me. Some hotels put a safe fee on your bill, even if you never use the safe. You can ask that it be removed. Same for the newspaper fee.
Finally, gone are the days when hotels could be canceled by 6 p.m. on the night of a reservation for a full refund. Cancellation policies are all over the map now and can even vary based on how the reservation was initially made. Never book a hotel without knowing what the cost of a breakup would be. Travel always involves adventure, which involves unpredictability, which means plans change. Make sure you plan for that.

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