Are Airlines Toast?
Like a lot of people, I used to enjoy flying. Packing up, going to the airport, standing in line, and jetting off to exotic places like Chicago was a welcome break in my otherwise non-adventurous life. No more. Now I view airline travel as an occasional necessary evil.
New security measures resulting from the thwarted Detroit bombing promise to make flying even more of a hassle than it already is. This comes at the same time as the economic slowdown is changing a lot of vacation plans. Competition for passengers is brutal. If ever there were a time not to be in the airline business, now would seem to be it.
Why, then, are airline stocks performing so well lately? Even after a small retreat since the Christmas Day incident, Claymore/NYSE Arca Airline ETF (FAA) has still more than doubled from its March 2009 low. How can this be?
I do not believe this is simply a result of economic recovery hopes. The more likely answer is that airlines are, like banks, a government-protected industry. They employ a lot of people, directly and indirectly, so the politically expedient move for Washington is to do whatever it takes to keep them in business.
Imposing ever-greater security measures might seem inconsistent with this goal. I have a theory there, too: the security measures are not really security measures. The real goal of all the screening and searching is to create the appearance of security, thereby reassuring passengers and keeping the airlines in business.
The fact is that any terrorist who wants to create havoc doesn’t need to get on a plane to do it. The same amount of explosive can kill just as many people and send just as big a message in any number of places. Extremist groups are well aware of this. So are airlines and their regulators. Even if it were possible to make the airliners 100% secure (and I’m not sure it is, short of stripping the passengers naked and giving everyone a body cavity search), terrorists would simply find new targets.
This being the case, major airlines are probably just as safe as major banks, and for similar reasons. At some point the bailouts and protection will stop working, but that point seems far in the future for now.
Disclosure covering writer, editor, publisher, and affiliates: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.