by Tom Essaye
The old saying is that the best way for a billionaire to become a millionaire is to buy an airline. And there’s indeed truth to that. For years airlines have been one of the worst sectors to invest your money in.
Look at what you go through when you travel today …
Planes are full-to-the-brim. Then you get nickel and dimed with bag fees, peanut fees, television fees, leg room fees, with no end in sight.
Even with all that, most airlines still can’t make a buck!
But last week something occurred in that sector that appealed to my contrarian investing mindset …
Delta Air Lines (DAL), the nation’s second largest airline, announced it was buying a mothballed Phillips 66 refinery in Trainer, PA. The terms of the deal were that Delta will pay $150 million for the refinery, and spend another $100 million to customize the facility.
According to Delta, buying the refinery could provide the airline with 80 percent of its domestic jet fuel needs, and save them $300 million annually. Additionally, they said that the investment would produce a positive return during the first year, which seems pretty aggressive to me.
This Is a Bold Move by Delta, and a Risky One!
Refining, much like air travel, is a cyclical business. So to link two of them together might not be the best strategy. But on the other hand, if energy prices keep rising like they have been over the past 10 years, this could look like a stroke of genius down the line.
Regardless, I applaud the Delta’s management for thinking outside the box. In an age of corporate America dominated by compliance departments and yes-men, it’s refreshing to see someone try something new. Perhaps, finally, management at a traditional “hub and spoke” airline is thinking creatively enough to actually make the business profitable.
I’ve never owned an airline stock (I have shorted them profitably many times). But if I were shopping for one, I’d take a serious look at Delta for the sole reason that management has moxie.
Delta’s Move Got Me Thinking about the Airline Sector in General
We’ve seen tremendous consolidation over the past several years as many of the airlines we were used to travelling on have been swallowed up. Now it looks like that trend may continue with US Airways trying to acquire American Airlines.
The consolidation has reduced the competitiveness on many routes. Consequently, airfares are on the rise. And rising airfares combined with the never-ending “extra” fees has created new and greater revenue streams for the remaining airlines.
Additionally, we have to remember that airlines, more or less, are inversely correlated to the price of oil. Oil broke badly last week, and if its decline continues, it will be bullish for the airlines in general.
One way you can play the airlines is through the Guggenheim Airline ETF (FAA). Be aware, however, that the ETF doesn’t trade with a lot of volume, which could mean a big spread between ask and bid prices.
Being a contrarian doesn’t just mean buying sectors that are depressed. It also means challenging the status quo and looking for evidence of a turn in sectors or companies before the rest of the market recognizes them.