airline article

[MikeD]

Sorry.......didn't have the link, but is an interesting article.


Follow the dinosaurs to airline profits

As the big carriers sink into the ooze, their smaller cousins are poised to benefit greatly -- if the big guys' trouble doesn't pull them under, too.

By Michael Brush

For years, investing in the airline sector was easy. All you had to do was consider that in its entire history, the U.S. commercial airline business has never made money -- then move on to other groups with better prospects.

Now, though, with oil at $54 a barrel, much of the industry on the verge of bankruptcy and a big bang of change apparently about to rip through the sector, many airline stocks look enticingly cheap.

Should you buy them? To figure this out, we talked with airline sector analysts, money managers who own these stocks and experts at a credit analysis outfit called CreditSights, an independent research group that pores over corporate balance sheets and industry fundamentals to come up with recommendations on stocks and bonds.

The airline sector has lots of moving parts, but here’s the bottom line. Most of the “legacy” carriers such as US Airways (UAIRQ, news, msgs) or Delta Air Lines (DAL, news, msgs) may be excellent trading vehicles as they bounce around on the ups and downs that play out in their complex stories. But as long-term investments, it’s better to take a pass, even if they are trading at 52-week lows.

Some of their regional partners look like buys, and others look pricey, creating some interesting “pairs” trades in which you short one stock but go long another in the same sector. Banks and insurers
check your credit.

So should you.

Low-cost carriers such as JetBlue Airways (JBLU, news, msgs) or Southwest Airlines (LUV, news, msgs) look like the real potential winners in the ongoing shakeout in the sector. But you’d do well to be patient and buy these stocks on dips because they look pretty fully valued.

Here’s a closer look.

The dinosaurs:

Our country has six “legacy” carriers whose roots and cost structures trace back to the grand old days of airline travel: Delta Air Lines, US Airways, Northwest Airlines (NWAC, news, msgs), Continental Airlines (CAL, news, msgs) and the parents of United and American airlines, UAL Corp. (UALAQ, news, msgs) and AMR Corp. (AMR, news, msgs).

These airlines are saddled with high labor costs, unions fighting to protect pay and benefit levels, huge pension obligations they might not be able to meet and too much capacity. Sky-high fuel costs mean even more turbulence. Two of these airlines -- US Airways and United -- are in bankruptcy proceedings. A third, Delta, may be on the courthouse steps any time.

Their stocks are at or near 52-week lows, which makes them look attractive. To be sure, these stocks can make great trading vehicles for the swift and the nimble. For example, if Delta wrests concessions from its pilots on pay, its stock may get a needed bounce. Or, if the “terror premium” in oil -- which could be as high as $10 per barrel -- backs off after the election, the dinosaurs benefit.

But as long-term investments, you’d be better off avoiding these dinosaurs. First off, it’s crucial to remember that the shares of a company going into bankruptcy just about always end up getting diluted -- or wiped out altogether.

Dinosaurs that emerge from bankruptcy will look leaner and meaner. But they won’t be as lean and mean as low-cost carriers like JetBlue or Southwest, which continue to claim victories over the dinosaurs.

And here’s a big problem for the airlines that look safe. The dinosaurs in or near bankruptcy may use Chapter 11 to shed huge burdens like their obligation to pay pensions and other debt. They may also get juicy concessions from labor. That puts the dinosaurs that don't go bankrupt at a serious disadvantage. With their higher costs, those dinosaurs will be left with no choice but to be the ones with higher ticker prices or watch as margins get hit while they cut ticket costs to stay competitive. Either way, it won’t be good for their stocks.

Some investors try to argue that a dinosaur like Northwest Airlines looks relatively safe from competition, with hubs in Minneapolis, Detroit and Memphis. But Northwest has some serious cost-cutting ahead of it, and needs to come up with about $4 billion to fund retirement plans, said Roger King, an airline sector analyst with CreditSights. One option, says King, might be to fund it with equity, diluting existing shares.