The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
By Ryan Fuhrmann
NEW YORK (
) -- Between 1970 and 1975, a quarter of companies in the U.S. railroad industry were forced to file for bankruptcy protection. There were simply too many competitors and they could not handle the high levels of government regulation, volatile fuel costs and the billions of dollars it took to maintain thousands of miles of track, locomotives and freight cars.
Since that time, the remaining competitors have steadily merged and there are only seven leading players today. The leading players now have the size and scale to justify high capital expenditure costs and can effectively compete with the trucking industry. A government report stated that railroads have seen productivity gains that have far exceeded the gains seen in other industries and the economy as a whole.
In perhaps the biggest vote of confidence the industry could ever receive,
announced he would spend $26 billion to acquire Burlington Northern Santa Fe, one of the largest companies in the space, in late 2009. Railroads have become great investments.
But I'm not interested in railroads as an investment. I'm more interested in the next sector to follow in their footsteps: the leading U.S. airlines.
This may seem strange, given the history of bankruptcy in the airline industry. Buffett himself once famously called airlines "lousy investments." But the same could be said about the railroad companies at one time. I think some of the major airlines have turned over a new leaf, so contrarian investors who get in early before the crowd realizes it stand to make a lot of money.
For starters, the airline industry has many similarities to the railroad industry: heavy regulation, volatile fuel costs and very high fixed costs to buy and maintain airplanes, support airports and maintain safety for flight crews and passengers. Many airlines, including Braniff and Eastern Airlines, ceased to exist (both liquidated in 1989), while big players were forced to declare bankruptcy. United Airlines went bankrupt in 2002 and it was U.S. Airways' turn in 2004, only to be followed by Delta Airlines in 2005.
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A trip through the bankruptcy courts allowed these leading players to clear away debt and push through other needed reforms. And more recently, the largest airlines undertook a series of mergers that have made them more competitive. Last year, United merged with Continental to form
United Continental Holdings
(UAL - Get Report)
, while Northwest Airlines merged with Delta to form
(DAL - Get Report)
in 2008. There is speculation that there could be further activity, with
a possible party to a big deal.
Like railroads, airlines have consolidated sufficiently to make them sustainably competitive. The proof is in the cash flow, as detailed in the table below.