In 2001, after 9/11, all US-based airline stocks were in danger of going bankrupt. Without the US government bailing them out while instead beefing up the TSA, as well as the American consumer’s fear of ever flying again, the sector was dealt a serious blow. Osama Bin Laden changed the way we fly forever, but airline profits returned, and have been a hot sector of late, particularly as we’ve seen fuel prices plummet. In fact, since October 2014, airlines have over-performed nearly every sector in the stock market.
We all recall the horror of American Airlines Flight 11 and United Airlines Flight 175 flying into the twin towers on September 11, 2001 – it’s the single most followed news story of our generation. Most do not know the severe tumble taken by airline stocks in the years after 9/11, though, and fewer know their remarkable rebound in an industry that was feared to be bankrupt forever. There was a call to nationalize airlines like they do in many countries in order to protect passengers, and little more than two weeks after the attacks, Congress passed the Air Transportation Safety and System Stabilization Act, which provided aid valued at as much as $15 billion – essentially creating “Uncle Sam Airways”.
Under the terms of the legislation, $5 billion was paid out directly. Roughly 90% was given to passenger airlines, with the balance to cargo carriers. The amount paid to each company depended on its marketshare, which was determined by its proportion of available seat-miles offered in the market. For instance, US Airways Group, Inc. ($LCC) the company with the second largest share of available seat-miles, received nearly $800 million. The remaining $10 billion was to be used by the Air Transportation Stabilization Board (ATSB) to guarantee loans. The ATSB was authorized to extend loan guarantees according to rules that made its mission statement so nebulous that it could grant almost any request.
The airline industry faced difficulty long before the events of September 2001. For years, the union-burdened old-line hub-and-spoke carriers, such as US Airways, American Airlines ($AAL), and Delta Air Lines, Inc. ($DAL) had struggled against increasing competition from smaller, more efficient, and more cost-sensitive competitors, such as Southwest Airlines Co ($LUV). After 9/11 the financial hardships faced by the traditional carriers were exacerbated, and this provided a unique opportunity for these firms to petition the government for help, and help they did.
Uncle Sam Steps in to Save the Skies
It took more than a decade for airlines to recover even after September 11 as the industry really took it on the chin in 2008 with shares dropping from $50 to $3 in United Airlines ($UAL) during the Mortgage Crisis selloff for all stocks.
In 2009, Uncle Sam had to bail out the Banks with the TARP Funding, so airlines went right along for the ride – but it took longer for shares to stabilize. In fact, it took a full 15 years before the effects of the September 11 attacks left the airline industry showing that nearly every industry has its peaks and valleys, but the consumer should be glad that the industry did not nationalize and kept competition between airlines intact.
Today, the consumer has adapted to an a la carte menu of paying for baggage, soft drinks, Wi-Fi or a cocktail on their flight – or they can just buy a seat and a meal. Airlines still have normal delays, and on certain days, the lines to get through security can be long, but the pre-9/11 way we traveled is gone. Still, for airline stockholders, there’s reason for optimism, because 15 years after a temporary injection by Uncle Sam Airways, airline stocks are the best performers in many portfolio manager’s basket of stocks.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer