In this segment of the Motley Fool Money radio show, host Chris Hill, Million Dollar Portfolio's Jason Moser and Matt Argersinger, and Aaron Bush of Supernova and Rule Breakers discuss the extremely bold assertion by the CEO of American Airlines Group (NASDAQ: AAL) that even in bad times, passenger carriers will henceforth be able to make a profit. Considering how many years that hasn't been the case, and just how many billions they've lost over the decades, how seriously can anyone take this statement?
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A full transcript follows the video.
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This video was recorded on Sept. 29, 2017.
Chris Hill: One of Warren Buffett's more colorful quotes about business is that airlines are so bad that if a capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. Oh, how times have changed, gentlemen. This week, Doug Parker, the CEO of American Airlines, said, "I don't think we're ever going to lose money again. We have an industry that's going to be profitable in good times and bad." Boy, Matty, that is really leaving no wiggle room whatsoever. Are things that good, not just for American Airlines, but for the industry writ large?
Matt Argersinger: I don't know about never losing money again. I'm sure they will find ways to lose money again. But like railroads 15 years ago, when Buffett was getting into railroads, I do think there's been a shift. And it's a major shift. And I think, as investors, we look for places in the market that are cheap, neglected, undervalued. Airlines have been like that for decades. But with the consolidation in the industry, we have the four top airlines now controlling 80% of tickets -- you have the new ability to charge fees for luggage, seat preferences, food, entertainment, that really wasn't there before in pricing.
And the biggest story is, I think, the secular downtrend in oil prices. I think one of the reasons the CEO of American Airlines is making that statement is because he sees a future of much lower oil prices. Forever, that was the biggest operating cost for airlines, was fuel prices. If those are coming down, and airplanes themselves are more efficient, that does paint a more profitable future. Morningstar just came out with a recent report that I found interesting, and they kind of agree with the sentiment by American Airlines CEO by saying, even in a recession or the aftermath of a shock like a terrorist event, those things used to really cause terrible havoc for the airlines. Now, they think even in those environments, they're going to be profitable.
So there's agreement there. It's not just a boom-and-bust industry anymore. So I have to say, I think it's a time to look at airlines.
Jason Moser: I mean, never losing money, that's a very bold statement. I imagine at some point or another, they whip out the old non-GAAP card, or adjusted earnings or whatever, if they have a less-than-stellar quarter. But never losing money, that just seems to me a very bold statement for a historically tough, tough investment.
Hill: I don't know Doug Parker, and I'm not a shareholder of American Airlines, but I was just trying to think, any stock that I own, any company that I'm a part owner of, would I want that CEO to come out and say something like that? Howard Schultz, he's not running Starbucks anymore, but even if you're an Apple shareholder, do you want Tim Cook coming out and saying something like that?
Moser: I'm a bit more of an under-promise and over-deliver guy, Chris.
Chris Hill owns shares of Starbucks. Jason Moser owns shares of Apple and Starbucks. Matthew Argersinger owns shares of Apple and Starbucks. The Motley Fool owns shares of and recommends Apple and Starbucks. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.