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