Coffee, Tea or Versace?

By DAVID MOON, Moon Capital Management
July 17, 2005

I think I've figured out why I've never owned stock in an airline: I've been trying to evaluate the airlines as members of the wrong industry. For years I thought companies like Delta were in the business of moving folks from place to place in airplanes. Viewed in that light, the airline industry, in total, is pretty dismal.

This year is the 102nd anniversary of the Wright Brothers' flight at Kitty Hawk. The commercial airplane business followed closely behind, as barnstormers crossed the country in 'aero planes,' giving normal people the opportunity to fly with the birds. In those 102 years, the entire commercial airline industry has cumulatively lost money. They haven't made a nickel. They keep turning to government, begging for bailouts from bad decisions, overgenerous labor agreements, poor business climates or badly run pension plans. It's a terrible business, or so I thought.

Then I realized that airlines are not in the business of flying people around the country. They apparently are now in the fashion business. At other times their core businesses have included Internet service, entertainment, telecommunications and dining. But these days, Delta seems to be in the fashion business.

Delta hired Kate Spade to create uniforms, handbags and shoes (ensembles?) for its female flight attendants when it started its low-cost carrier, Song, a couple of years ago. The men at Delta wear suits created by Hollywood designer Richard Tyler. (Tyler designs for Desperate Housewives and has outfitted Julia Roberts.) The company is changing the dress for all of its flight attendants, gate agents and Delta Crown Room employees. These new clothes almost make me want to cancel my direct flight on United to Chicago so I can fly through Atlanta on my next business trip to the Windy City. Delta is threatening bankruptcy, but it is able to spend millions to make sure everyone looks nice when the balance sheet crashes.

In earlier times the industry acted as if its fate depended on its ability to get customers to pay surcharges for fancier meals. Then the airlines were going to make a bunch of money charging fliers to make phone calls. Then it was Internet service and premium movies. They even tried to lure patronage by positioning their airport lounges as exclusive places to entertain and conduct business, whether you needed to be at the airport for a flight or not. 'Come have dinner on us. I'm sure your clients will be impressed with free booze, pretzels and goldfish crackers.'

When a company (or entire industry) forgets its business, investors should beware. The airlines are doing the equivalent of rearranging deck chairs on the Titanic. They have huge problems with their capacity, balance sheet and business model. So they change clothes. That makes a lot of sense.

In other industries, companies sometimes act as if they are in the meteorological business, starting each quarterly report with an analysis of how some rare act of God wreaked havoc on their results. Over and over again, a rare act of God is to blame for poor results. It's enough to make me wonder about the definition of 'rare.'

Some businesses are in the business of selling nothing other than their own stock. Their customers really aren't their customers; their shareholders are. While these businesses would welcome paying customers, they usually spend more energy courting new shareholders so they will have enough cash to fund their paychecks each quarter.

The legendary mutual fund manager Peter Lynch once said that you should only consider buying stock in a company if you can explain to a third grader in a couple of minutes the business of that company. If the executives of a business don't act as if they can pass that simple test, pass on the stock.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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