Airlines have been, and will likely continue to be, a notoriously bad investment. The industry is capital intensive, massively fragmented with hundreds of global players, heavily regulated, and unionized… with no real way for carriers to differentiate their services. Bankruptcy courts keep carriers alive in a zombie like state allowing them to continually erode margins while regulators block mergers. And on top of that, the industry attracts new entrants every few years despite low expectations for return. There is absolutely no reason to expect any player in this industry to generate above average returns on invested capital. But within the industry, there are a number of players that have been able to consistently generate a reasonable return on invested capital, and at the right stock price, that’s all investors need. In particular, regional airlines and airplane/engine lessors have generally been able to secure long-term contracts guaranteeing rates of return in the range of 3%, which when leveraged 4-5x yields a 12-15% return on equity. At the moment, there are a number of players in both industries trading at unusual valuations. In this report, we focus on the regional airline industry. In the future we will also take a look at equipment lessors…
