By LIAM DENNING
Masochism is part and parcel of a fetish for automotive and airline stocks, and not only because of the periodic beatings they deal their investors. It also echoes a concept at the heart of how these two sectors will perform this year: discipline.
Airlines and auto makers have longstanding problems with overcapacity. Politicians' attachment to domestic-vehicle factories and the jobs they provide, as well as an aversion to airlines cutting unprofitable routes, play a big role in this.
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New GM vehicles at a dealership last month.
U.S. auto makers also have lost domestic market share to expanding foreign competitors, while airlines suffer from the relative ease with which new competitors can lease planes. The result is a history of poor capacity utilization and, therefore, weak pricing power and profit margins.
The global financial crisis forced some overhauls. Airlines merged and cut capacity, while Detroit's Big Three shuttered some factories and reset relations with unionized labor. Above all, they found religion on the need to sell seats and vehicles profitably, even if that meant selling less of them.
There have been worrying signs of this newfound discipline breaking down, however. Last month, J.P. Morgan Chase cut price targets for several U.S. carriers' stocks, concerned that airlines hadn't moved aggressively enough in terms of cutting capacity and raising prices to pass on higher fuel costs to customers. This week, the International Air Transport Association revised down its net profit forecast for the global airline industry, expecting a fall of 46% from 2010.
The airlines at least have the benefit of structural constraints on rising capacity, not least the inadequacies of U.S. airport infrastructure laid bare by winter storms.
The bigger risk is in the automotive sector, where incentives, or consumer subsidies such as cash-back payments, are creeping up again. General Motors is the main culprit. Its average incentive per vehicle last month was $3,732, the industry's highest, according to Credit Suisse, and up 13.7% year on year.
GM says the increase is temporary, and both Ford Motor's and Chrysler Group's incentives still are down year on year. But Ford increased its own incentives 5.6% last month, possibly responding to GM's big move in January.
Moreover, GM may find it hard to kick the incentive habit if oil prices remain high, hurting demand for thirsty trucks. Profits from trucks can be up to 1.4 times the average across all vehicles, according to Deutsche Bank. There could be a temptation to fight for market share with increased subsidies.
Above all, despite the catharsis of bankruptcy, the U.S. automotive sector remains much more competitive than back in GM's heyday. The number of competitors today is 13 compared with six in the 1960s, says Goldman Sachs.
The potential for hotheads to kick off destructive price wars is a structural risk for the car makers and their investors.
Write to Liam Denning at liam.denning@wsj.com
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