The Unfriendly Skies

By Malcolm Berko

April 19, 2017 5 min read

Dear Mr. Berko: I bought 200 shares of United Continental Holdings last year at $76, and I've been behind the eight ball since. My broker wants me to keep the stock. I'm disappointed with it and inclined to sell. What is your thinking on this stock? — TL, Detroit

Dear TL: Sell it! Except for some special TWA bonds that were secured by physical assets, I've never recommended an airline stock. Airlines haven't been on my goodwill list since the late 1980s, when I listened to a group of airline executives use the term "cattle count" in reference to the number of passengers they carried. Now United's red-eye flights turn out to be black-eye flights.

Airlines have never been good long-term investments. It appears that the industry reached its profit peak in 2016 and is on the decline — again! Though strong travel demand may generate a minor tail wind this year, the people in management at most carriers appear congenitally unable to keep operating costs down. And as inutile management flounders in its cost control efforts, slumping passenger yields will force margins lower, and some of the weaker carriers may be forced to recapitalize — again! Meanwhile, the industry's infantile efforts to control costs have led to sneaky increases in revenues (non-ticket items), which airlines use to mitigate their cost control failures. Last year, additional revenues from charges for luggage (which is often abusive), advance seating reservations, pay-per-view entertainment, internet usage, changing flights, special ticketing, additional legroom, refund penalties, etc., exceeded $66 billion globally. And last year, United Continental's (UAL-$68) $5.7 billion in ancillary revenues totaled $41 per passenger and were 15 percent of the carrier's $38 billion in gross revenues. Wow!

The following is a quote from Warren Buffett's 2002 interview with The Telegraph, one of the U.K.'s largest newspapers: "If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It 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. You've got huge fixed costs. You've got strong labor unions. And you've got commodity pricing. That is not a great recipe for success. I have an 800 number now that I call if I get the urge to buy an airline stock. I call at 2 in the morning and I say: 'My name is Warren, and I'm an aeroholic.' And then they talk me down."

Though I think UAL could increase revenues this year to $40 billion, I doubt net income will be much-improved. Fuel costs, the largest single industry expense, are set to increase for the first time in two years. In the past, when the industry used the futures market to hedge against rising prices, the results were bloody as fuel prices plummeted. And I'd not be surprised if the airlines (including UAL) did it again. That should scare the bejabbers out of you, as well as other investors. I'm concerned that UAL, which has the highest airport costs among U.S. carriers, has proved itself powerless to control those costs. I'm also concerned about UAL's labor costs and the fact that 80 percent of its workforce is part of a union. Last year, over 30,000 ground workers were granted raises of 30 percent, prorated over five years, and UAL's pilots were given 16 percent two-year pay raises. I'm also concerned that last year, UAL's mechanics, who are represented by the Teamsters, overwhelmingly rejected the carrier's offer of a 33 percent increase over six years. This is likely to become a thorn in operations, and a potential strike could clip UAL's wings while putting more pressure on earnings. It also concerns me that UAL's high-margin Atlantic and Pacific routes may be negatively affected by a significant increase in capacity, which will definitely dampen 2017 profits.

Sell your UAL. I doubt that it will return to your $76 purchase price this year or next. I must tell you that Thomson Reuters, Barclays, Zacks and Merrill Lynch have "buy" recommendations on the stock, but I think they're either drunk or bonkers.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at

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