As far as many investors are concerned, airline stocks should be
avoided like the plague. Every time the economy hits a rough patch,
these heavily-indebted companies look as if they're lunging toward
bankruptcy. Countless investors have had to dump airline stocks
after losing most of their investment, vowing "never again."
Truth is, this whole industry makes for lousy investing but great
trading. At the bottom of the economic crisis, for example shares
of United Airlines parent
fell to $3 as the company faced open-ended losses. Shares are up
+800% since then. If history is any guide, share prices will fall
sharply again once investors are spooked by a slowing economy or a
spike in oil prices. And after that, shares will again post a sharp
rebound. You just have to play the cycle. Buy-and-hold doesn't work
here. The swings may not be as wild as in the past, though, as
carriers have learned to live with less debt and lower costs --
ingredients crucial to surviving a downturn.
Right now, the airline industry is benefiting from many tailwinds,
AMEX Airline Index (AMEX:
has risen +15% since early May, even as the rest of the market was
slumping. During the past five trading sessions, the
has risen +10%, the best gain of any sector. Gains are coming from
a combination of good passenger statistics from the airlines, and
positive analyst comments. Importantly, this is an industry on
which you need to do your own research. The analysts that follow
the airline stocks have a tendency to only slowly update their
outlooks and forecasts, even as salient data come in much more
frequently. For example, the price of oil may fall from $80 to $70
a barrel, but many analysts won't let that important factor alter
their forecasts until the next time quarterly results are
delivered. Not to bash the analysts -- they are a bright group with
deep industry knowledge -- but their stock-picking record has not
So how can you do your own research? By keeping tabs on the
following major factors. If you do, you'll have a sense of when to
buy or sell these stocks before the analysts change their
Oil prices. Jet fuel is a bit more expensive than gasoline,
but its pricing largely correlates with the direction of oil
prices. Sharp moves up or down in the price of oil are a big
factor. Airlines start to feel real pain as oil prices rise,
but they don't always benefit when prices fall. That's because
falling oil prices are often related to concerns that global
economic activity may be cooling. Generally speaking, oil
prices between $60 and $80 a barrel represent an ideal range
for airlines as these levels signal a healthy economy yet
manageable fuel costs. As a personal rule of thumb, I would
never buy airline stocks when oil prices are outside of that
Hedging. But that logic does not apply to the carriers that
are wise enough to lock in jet fuel prices when they are lower.
If you have the time, peruse the recent SEC filings where
carriers discuss how much of their future fuel needs are
hedged, for how long and at what price. Rising or falling
prices affect different air carriers to varying degrees.
Earlier this spring, an analyst upgraded
U.S. Airways (NYSE:
when fuel prices dropped. U.S. Airways had neglected to
, so it stood the most to gain from oil's fall.
Domestic vs. international. A clear dichotomy has emerged in
the global travel market. The U.S. market is quickly improving,
as more seats are filled at higher prices. Year-over-year
profit comparisons for domestic-focused carriers such as
and U.S. Airways are going to look very good in the June
quarter. If the U.S. economy keeps rebounding and unemployment
drops over the next year or two, then profits should spike well
higher from here for these names. Notably, their bigger rivals
have cut back on many routes, so competition is less intense.
The major carriers such as
, the parent of American Airlines, and
could be hurt by further economic troubles in Europe, though
their U.S. business should look quite good.
Merger mania. Delta 's decision to merge with Northwest has
proved to be a smart move, as excess costs and overlapping
routes were pared. Now, investors expect to see the same
synergies result from UAL's merger with
. The deal is not only good for those two carriers, but for the
whole industry, as it leads to more rational pricing schemes.
It also can be a boost to the low-cost carriers like Southwest
and JetBlue that look to build
in areas where the big carriers have pulled back too much.
Action to Take -->
Despite the recent move, airline stocks still look very attractive
-- if you believe that the economy will keep improving. But know
that these shares could sharply retrench if oil prices rise or the
economy loses steam. I remain a fan of Southwest and JetBlue, as
they have proven they can avoid losses in the bad times and still
post solid profits in the good times.
-- David Sterman
Disclosure: David Sterman does not own shares of any security
mentioned in this article.
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