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Airline Stocks Could Be Ready for Take Off
When I was a young, clueless investment banker at Morgan Stanley 30 years ago, the head of equity sales took me aside to give me some fatherly advice. Never touch the airline industry. The profitability of this industry is totally dependent on fuel costs, interest rates, and the state of the economy, and managements haven’t the slightest idea of what any of these are going to do.
At the time the industry had just been deregulated, and was still dominated by giants like Pan Am, TWA, Eastern Air, Western, Laker, and a new low cost upstart called People Express. None of these companies exist today. It was the best investment advice that I ever got.
If you total up the P&L’s of all of the airlines that ever existed since Orville and Wilber Wright first flew in 1903 (their pictures are on my new anti-terrorism edition pilots license), is a giant negative number, well in excess of $100 billion. This is despite the massive government subsidies that have prevailed for much of the industry’s existence. The sector today is hugely leveraged, capital intensive, heavily regulated, highly unionized, offers customers terrible service, and is constantly flirting with, or is in bankruptcy. Its track record is horrendous. They are a prime terrorist target. A worse nightmare of an industry never existed.
I become all too aware of the travails of this business while operating my own charter airline as a sideline to my investment business. The amount of paperwork involved in a single international flight was excruciating. Every country piled on fees and taxes wherever possible. The French air traffic controllers were always on strike, the Swiss were arrogant, and the Italians unintelligible. The Greek military controllers once lost me over the Aegean Sea for two hours, while the Yugoslavs sent out two MIGs to intercept me.
While flying a Red Cross mission into Croatia, I got shot down by the Serbians, crash landed at a small Austrian Alpine River, and lost a disc in my back in the process. I had to make a $300 donation to the Zell Am Zee fire department Christmas fund so their crane could life my damaged aircraft out of the river. Talk about a tough business!
All of this leads me to conclude that there may be an opportunity here in airline stocks. The industry has once again been decimated by high oil prices, taking stock prices down to single digits. Many of these stocks have fallen so far, they have essentially become long dated call options on the companies with equivalent pricing. So for a little upfront cash you get a lot of bang for your buck.
A Darwinian concentration has taken place over the last 30 years that has concentrated the industry so much that it would attract the interest of antitrust lawyers, if it weren’t losing so much money. Delta and United now control 50% of the US market, American 15%, and Southwest 10%, giving a 75% share to the top four carriers. The industry has fewer seats than in 1982; while inflation adjusted fares are down 40%.
They have taken yet another bloody nose from high oil prices, but this time they are covering a lot of this with higher fares, fees, and fuel surcharges. I can’t remember the last time I saw an empty seat on a plane, and I travel a lot.
The real kicker here is that stock in an airline is in effect a free undated put on oil. If Khadafy suddenly chokes to death on a falafel, and the fear premium for crude disappears, these stocks would soar. You could easily have a five bagger on your hands.
I would vote for the airline that has been least adept at hedging its forward fuel needs through the futures market. That would be American Airlines (AMR). That means they will hurt the most now, but rake it in the most on any oil price pull back. And even if the decline in fuel prices turn out to be modest, a recovering US economy should boost profitability, given its recent maniacal pursuit of controlling costs. Just the missing pretzels alone should be worth a few cents a share in earnings. And no, I didn’t get free frequent flier points for writing this piece.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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I'll buy an airline when they can make planes run on coal.
AMR just received an unsolicited offer of $9.75 a share for all outstanding stocks. AMR stocks were trading at $6.80 on Wednesday morning
http://www.bizjournals.com/dallas/news/2011/03/30/amr-probing-mysterious...
They are not sure if it is legit. Might be MHFT.
Good article except for this,
Peak oil MHFT. Read about it.
I think the best play is BA. No reason to own an airline when their books look like a dog chewed at the edges. BA is like owning a gold miner. They produce what you want.
let me see if I got this right...
We should be long airline stocks because A) managment doesn't know what's going to happen, B) the economy is in recovery and C) oil prices are going to go down.
is that about right?
In that case, I have some oceanfront property in Nevada that's real cheap, the government tested some weapons on it, or something in the 50's, but you should buy it, it's way undervalued.
Low price does not equal undervalued. Airlines have some price elasticity but if they hike up the fares, teleconferencing becomes a much more "P&L Friendly" proposition. People are already pissed about the TSA playing Fukushima with their bodies. There's a breaking point where the marginal cost of flight (not only accounted for in dollars) exceeds that of the nearest competitors. If it weren't for the government subsidies, that would have happened a LOOOOONG time ago.
While you're at it, put your granparent's retirement fund in C, I hear it's hot!
Forget the play on oil BS. Buying the airline stocks is nothing more than a leveraged beta play on the overall market. Combined operating and financial leverage in the sector is higher than any comparable group.
Totally awesome post! Owning airlines is certainly a briliant move and an excellent alternative to owning Federal Reserve Notes ("cash")!
Never underestimate the replacement power of stocks within an inflationary Zimbabwe-esque spiral.
You truly are a mad hedge fund trader. Your friend in equities was right, and you are completely fucking clueless.
What do you have to do to get posting privileges at ZH? Send in $5 and 3 boxtops of Cheerios?
...and MHFT brags about all the calls he's made, even when he hasn't made them.
...... "a young, clueless investment banker"
This guy is terrible. Some of his recommendations: Buy CSCO before earnings (down 20%), short the Yen (when it was around 85), short the Euro (at 1.30). A total horseshit!!!!!!
I wouldn't be betting on the long term prospects of mass consumer air travel.
He is called Mad.. for a reason.
I think the point of the article is to suggest a hedge for the case of the oil price dropping rather than marching in a straight line to 200$/barrel. Interesting recap on the the airlines, I remember reading an analysis a decade ago that proved the entire industry has never made a profit in aggregate (rather like biotech). At least a bit of a break from Au, Ag and Pu.
Why are they letting Cramer post here as "MHFT"???
Right on about seating. But will do LUV due to $$$ any day and suffer being a sardine. Why?
Had a round trip w/ one stop each way on LUV in February. Three were full planes and there were only 2 seats open on one leg from Midway to Charlotte - at 9:45 PM CST. On every flight 10-12 people had to check bags due to zero overhead storage.
I would have flown on Piedmont oops, USAirways, but they wanted $985 (+$70 for bags) for a mid-week vs. $288 for LUV that included $20 for preffered seating.
This article sucks and I don't want to hear about going long a fucking thing. The only reason why the mother fucking market is at 12,300 is on totally and utter CHina or Russian type manipulated BULLSHIT. How the fuck can you buy anything based on a total lie.
When enough people believe the lie, it becomes the truth.
+1 . Every headline @ yahoo finance should just read:
DOW up on QE.
DOW up on QE.
DOW up on QE...
not to mention, with all the sun activity and magentism shifts going on, another crash or series of crashes seems more likely.
That does it, I'm puttin' my 401K into Braniff. It should be a bargain at $0.00.
What happens to airline margins as engine fuel hits the highs...? They'll need higher occupancy rates just to B.E.
didn't you watch wall street mhft? ya don't touch airlines with a 10ft pole.
sheesh, even i know that.
on the bullish side, if we see continued earthquakes then people will want to live in the air
Uh...
The reason you don't see empty seats on airplanes is because the airlines have been eliminating routes and overbooking the remaining flights. Hardly a bullish indicator.
The head of equity sales gave you good advice...
... yet, thirty years later, still clueless.
"shot down...crash landed...intercepted by military...lost over Aegean..."
Anybody remember the 1960's cartoon "The World of Commander McBragg". Each espisode was about how he heroically and single-handedly won basically every battle in history. I think some dude writes this stuff and laughs his ass off while writing it. No one can be this pompous and out of touch. Or can they?
meanwhile, we can expect more confusion as to which way is 'north' on our compasses.