There is an old adage in investment: ‘You can’t make money in airlines’.
This has been true for a number of decades, with Warren Buffett once labelling aviation an investor “death trap”. However, in recent years, the often-maligned sector has been soaring due to many strong drivers. Industry consolidation on both sides of the Atlantic – such as the Ameri-can Airlines and US Airways merger, as well as BA and Iberia’s creation of IAG – has been a major feature. Ardevora has shared in the airline resurgence, with long-held name Southwest soaring to the top of the S&P 500 returns last year, up 124%.
Barry Norris, Argonaut Capital
“The US airline industry went through a very difficult credit crunch: it was basically on the verge of extinction. This forced risk disci-pline on managers,” Ardevora part-ner Gianluca Monaco says. “So we saw consolidation and ca-pacity was taken out, which really worked. This set out the opportuni-ty we have seen over the past few years. Combined with a slowly im-proving economic environment, it has led to better pricing as well.
“We started our positioning with the champion of the low-cost carri-ers, Southwest Airlines, a couple of years ago. But there are still oppor-tunities. We just added JetBlue, which is at a much earlier phase of its restructuring process.”
Alken founder Nicolas Walweski has been a backer of European low-cost dynamo Ryanair for some time. “We increased our allocation to Ryanair as the oil price started to weaken back in September last year. While the stock has rallied about 50% over this period, we still believe it remains cheap,” he says. “While one of the most obvious beneficiaries of the oil price drop, Ryanair is benefiting on many fronts and its competitive position is continually improving.” Argonaut Capital founder Barry Norris also holds on Ryanair. However, he has taken a short positon in low-cost competitor Norwegian in the group’s strongly-performing FP Argonaut Absolute Return Fund. “A successful budget airline must be able to win a price war” Norris says.
“While Ryanair is a proven winner and as such has seen considerable positive momentum behind its profit forecasts, Norwegian’s business model in our opinion only really works in Scandinavia when it comes up against easy competition in high-cost incumbent SAS. “Norwegian attempting to aggressively expand outside of its core markets – without a profitable business model and with a highly levered balance sheet – is in our opinion the airline industry equivalent of bringing a knife to a gun fight.”
Elsewhere in the US, Hermes Global Equity Fund manager Geir Lode and Nordea 1 - North American All Cap Fund manager Ed Cowart are holders of Delta Airlines. “We are optimistic about Delta’s prospects. Cheaper fuel in the US, driven by lower oil prices, not only reduces the carrier’s input costs but also acts as a tax cut for middleclass households,” Lode says. “Delta’s free cash flow yield continues to improve, and despite the recent rally, its stock valuation remains attractive.” Cowart adds: “Delta trades at a heavy discount to the market and peers. Despite this, we believe Delta has better durability of earnings compared to peers – due to lower interest costs, a revenue premium and a more variable cost structure. This industry has transformed in the last few years and Delta represents a compelling opportunity.”