Airline stocks a dud, says portfolio manager

Airline stocks a dud, says portfolio manager

Airline stocks a dud, says portfolio manager As new discount air service NewLeaf celebrated its maiden flight from Hamilton, Ontario on Monday, effectively throwing its hat into the ring that is the Canadian airline market, one portfolio manager is adamant that he would not invest in airline stocks, regardless of the company.

“I think airline companies are possibly the worst investments in the history of capitalism,” Dennis Mitchell, senior vice president and senior portfolio manager at Sprott Asset Management, related in an interview with BNN. “They are just horrible, horrible, businesses.”

He explained that airlines run a commoditized business with no pricing power, pointing out that WestJet slashed its prices by more than 50% on the days when NewLeaf flies. He further noted that the reason why most developed nations have one incumbent airline–such as AirCanada, AirFrance, and Lufthansa–with a churning series of competitors is because “air travel is almost a public good, meaning you almost want the government to provide it to everybody at a discounted price.”

On the costs side, Mr. Mitchell observed that airlines have absolutely no control over major commodity costs such as oil and steel, which generally have an upward bias over time. Another cost such companies cannot control is labor costs, due to the fact that airline employees are generally unionized.

He therefore reads the lack of control over both pricing and costs as a pincer that forces airline companies to settle for “razor-thin margins.”

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