Fisher Investments Editorial Staff

Of Autos and Airlines

By, 08/08/2008

Story Highlights:

  • Many take the US auto and airline industries as bellwethers of the American economy.
  • Past airline bankruptcies, über-high oil prices, and talk of looming failure among the "Big Three" automakers are among the factors weighing on today's sentiment.
  • But gloomy headlines fail to mention the relatively small impact these industries have on markets and the economy.


"Detroit Rock City." The 1976 hit from legendary rock group KISS glorified the city back then. But today, Detroit is on rocky terrain. US auto industry woes have troubled the city, not to mention many Americans, for years. And thanks to Tiger Woods' bum knee, the Detroit Three, namely GM, can't even get excited about their city hosting the PGA Championship.

Amid increasing focus on a slowing economy and high oil prices, airlines aren't faring any better in their bid to win our sympathy. But it's unlikely they'll get any sympathy as long as they keep up the poor service and continue charging us for water, checked bags, friendly smiles, etc… Don't get us started! Many US airlines are scrambling to cut losses and save jobs. (Honestly, who ever heard of a strategy seeking to punish its customers with poorer service and higher costs as a long-term business solution?)

Troubles in autos and airlines industries are easy for Americans to identify with, and as they're considered economic bellwethers, developments (or lack of developments) often make for big headlines. After all, industry bankruptcies, job losses, and plant closures are tough to digest, especially for those directly impacted. But the truth is they aren't large enough to have a significant long-term impact on the stock market or the economy.

Let's start with airlines. Most, if not all, airlines are small-cap stocks and the broader market is overwhelmingly larger. Next to a company like Exxon Mobil ($400 billion-plus market cap), airlines like Southwest ($12 billion), Continental ($1.6 billion), and British Airways ($3 billion) seem like teensy insects. Delta and Northwest recently received unconditional clearance from the EU to join forces and create what could be the world's largest airline. But even the combined revenues of such a venture, projected to be roughly $32 billion, only amount to 0.23% of a $14 trillion dollar US economy and 0.06% of the global economy.

Looking at auto stocks, there's a slight bump up in market cap from the airlines, but not much... Ford's market cap is a measly $11 billion—virtually in small cap territory and far below the weighted average market cap of global stocks at $68 billion. Were Ford's stock to disappear completely overnight, it would barely dent global market cap. Super-cap companies can gain or lose that much value in a single day's trading.

These are two bloated and highly inefficient industries, burdened by huge long-term liabilities, labor problems, and subject to much regulatory risk. Heck, automakers have struggled for years now and it's difficult to find any point in recent history where airlines were profitable as an industry, yet there's been no meaningful correlation throughout history between their fate and overall market direction or economic health. Woes in the automotive industry won't drive stocks or the economy off a cliff, nor will the current turbulence in the airline industry. Given the numbers, those arguments just don't fly.

Much of successful investing is about debunking commonly held myths to understand what really matters. That autos and airlines are major drivers of the US economy is a long-held bias—so long that most folks fail to even question it. Just think, if autos and airlines aren't nearly as worrisome as widely thought, what other common beliefs might be worth questioning?

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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