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Investors gamble on airline stocks recovery
September 19, 2008 / 6:09 PM / 9 years ago

Investors gamble on airline stocks recovery

<p>A Delta Air Lines jet taxis past a Northwest Airlines jet parked at a gate at the Minneapolis St.Paul International Airport in Minnesota April 14, 2008. REUTERS/Eric Miller</p>

By Mark McSherry - Analysis

NEW YORK (Reuters) - As the stocks of major U.S. airlines recoup more of their losses, some investors are tempted to bet that the revival might be for real.

Record fuel prices forced airlines to become more efficient by cutting routes, capacity and jobs, raising fares and introducing fees for checked bags and other services.

But crude oil prices have fallen from a record high above $147 in July to around $100 on Friday, taking most major airline stocks off the critical list and into recovery.

Shares of American Airlines parent AMR Corp AMR.N fell from $26 last October to $4 in July, but have since climbed to over $12. Continental Airlines Inc (CAL.N) stock fell from $37.79 in October to $5.91 in July but has climbed back to over $18.

Veteran stock picker Don Hodges, president of Hodges Capital Management, owns shares in both AMR and Continental and believes there is money to be made in some airline stocks.

“Overall, over the last month, airlines have made us money,” Hodges said, adding that management has taken steps that should have been taken years ago.

“They have cut back on unprofitable flights ... and they are charging more for tickets and charging for baggage and the chips they serve you,” added Hodges.

In the summer, most U.S. airline stocks were considered by many to be too risky for long-term investors, fit only to be “trading vehicles” for professional traders and speculators who can profit from short-term price movements.

But barring another spike in oil prices, some believe that airline stocks might now be worthy of wider interest.

“Airline equities deserve a closer look from an ever-broadening potential investor base,” said JP Morgan analyst Jamie Baker in a research note.

STILL RISKY

Most U.S. airline shares are still way below their 52-week highs -- with many investors still nursing huge losses -- but the stocks have rebounded well from their lows.

United Airlines parent UAL Corp’s UAUA.O stock plummeted from $51.60 last October to $2.80 in July but has climbed back to around $13. Delta Air Lines Inc (DAL.N) slumped from $21.10 in November to $4 in July but now trades at over $9.

The star of the sector is Southwest Airlines Co (LUV.N), which has a history of successfully hedging against high fuel costs and boasted a stock price on Friday of near $16, just below its 52-week high of $16.77 last September.

The rest of the sector has a lot of catching up to do, but some believe there is hope.

“The gloom has given way to some hope for the industry -- our concerns over bankruptcy filings this winter are diminished,” said Calyon Securities analyst Ray Neidl in a research note.

“We tend to be moderately bullish on the industry’s prospects and believe that they could return to profitability by late spring barring a sharp economic downturn or oil prices shooting past $150 a barrel,” Neidl said.

The fact remains, as some analysts have been known to write in their research reports, that trading airline stocks can be hazardous to your wealth.

But more investors appear prepared to take the risk.

“I think the industry is going to survive and there will be some good money made over a period of time,” said Hodges.

“If you only own 15 stocks you probably wouldn’t touch them. But where we have a mutual fund that owns 70 stocks, for us to do a little venturesome investing can make sense.”

Editing by Brad Dorfman

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