Airline Profits Have Been Grounded; Time to Short?

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Includes: AAL, DAL, JBLU, LUV, UAL
by: Robert Weinstein

Leadership is a matter of intelligence,trustworthiness, humaneness, courage, and sternness. -- The Art of War

Airlines have never been a favorite of mine. I believe the affinity that investors had toward Southwest (NYSE:LUV) has waned as the stock is now trading below the 200 day moving average. I do not travel as much as I used to, but I have to say that travelling in first class and using the lounges of United and Northwest are a bit of a disappointing experience for me. With the crazy methods of ticket pricing that do not appear to make logical sense, which I believe oftentimes leaves the customer feeling like the airlines are out to put the screws to them any way they can, there appears to be a serious disconnect between management and customers.

Recently, I read an article in the Wall Street Journal concerning the combination of higher fuel costs, winter storms and earthquakes and how they affect the airlines. From reading this, I decided to take a look at the airlines. While winter storms are quickly fading and earthquakes are relatively rare, it seems that higher oil prices will be with us indefinitely. The increase in fuel costs will likely create a severe headwind (no pun intended) and restrict airline profits. I took a look at EDGAR online to study the numbers to see if any of the airlines should be shorted. When I short a company for longer than a day-trade, I will sell call options, since it is less risky than an outright short sale. I also earn income each day of time decay as the expiration date approaches.

I have restricted my list to the major American airlines. Take a look at these and see if any of them meet your criteria for further study to enter into a short position with.

Southwest Airlines Co. (LUV) is a $8.86 billion market cap company. Southwest Airlines Co. operates as a passenger airline that provides scheduled air transportation in the United States. As of December 31, 2009, it operated 537 Boeing 737 aircraft and provided service to 68 cities in 35 states. Southwest airlines is finishing up their acquisition of AirTran, and reports that it should be completed on May 2, 2011. Their five-year credit default swaps have recently been trading at higher prices also. Click on all charts to enlarge:

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Southwest Airlines Co. was founded in 1967 and is headquartered in Dallas, Texas. LUV reported 1st qtr 2011 earnings of $0.03 per share on 4/21/11. The next reporing quarter estimated mean earnings is $0.23 per share. The low estimate is $0.17 and the high is $0.35 per share. The current trailing twelve months P/E ratio is 19.4 (ttm) and the forward P/E ratio is 12.59.

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  • Rising revenue year-over-year? Yes, $11.61 for 2010 vs. $10.01 billion for 2009.
  • Rising earnings year-over-year? Yes, $459 million for 2010 vs. $99 million for 2009.

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  • Rising EBITDA year-over-year? Yes, $745 million for 2010 vs. $164 million for 2009.
  • A dividend yield higher than I can earn in a bank account? No, $0.018 is a current yield of 0.152%.
  • Option trading available for the lowest risk entry possible? Yes.

Delta Air Lines Inc. (NYSE:DAL) is a $8.74 billion market cap company. Delta Air Lines, Inc. provides scheduled air transportation for passengers and cargo in the United States and internationally. It operates from airports in Amsterdam, Atlanta, Cincinnati, Detroit, Memphis, Minneapolis-St. Paul, New York-JFK, Paris-Charles de Gaulle, Salt Lake City, and Tokyo-Narita.
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The company was founded in 1924 and is based in Atlanta, Georgia. DAL reported 1st qtr 2011 earnings of $-0.38 per share on 4/26/11. The next reporing quarter estimated mean earnings is $0.53 per share. The low estimate is $0.18 and the high is $0.86 per share. The current trailing twelve months P/E ratio is 14.97 (ttm) and the forward P/E ratio is 5.35. As reported in the AP:

The five biggest U.S. airlines reported a combined loss of more than $1 billion for the first quarter, mostly due to surging jet fuel prices. But the total loss was only about $100 million more than a year ago even though jet fuel spending jumped by 28 percent.

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  • Rising revenue year-over-year? Yes, $28.1 for 2010 vs. $24.59 billion for 2009.
  • Rising earnings year-over-year? Yes, $593 million for 2010 vs. $-1237 million for 2009.

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  • Rising EBITDA year-over-year? Yes, $608 million for 2010 vs. $-1581 million for 2009.
  • A dividend yield higher than I can earn in a bank account? No, $0 is a current yield of 0%.
  • Option trading available for the lowest risk entry possible? Yes.

AMR Corporation (AMR) is a $1.96 billion market cap company. AMR Corporation, through its subsidiaries, operates as a scheduled passenger airline in the United States. The company, through its principal subsidiary, American Airlines, Inc., provides scheduled jet service to approximately 160 destinations throughout North America, the Caribbean, Latin America, Europe, and Asia.
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The company was founded in 1934 and is headquartered in Fort Worth, Texas. AMR reported 1st qtr 2011 earnings of $-1.21 per share on 4/20/11. The next reporing quarter estimated mean earnings is $0.16 per share. The low estimate is $-0.34 and the high is $0.58 per share. The current trailing twelve months P/E ratio is N/A (ttm) and the forward P/E ratio is N/A

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  • Rising revenue year-over-year? Yes, $19.75 for 2010 vs. $17.62 billion for 2009.
  • Rising earnings year-over-year? Yes, $-471 million for 2010 vs. $-1468 million for 2009.

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  • Rising EBITDA year-over-year? Yes, $-506 million for 2010 vs. $-1752 million for 2009.
  • A dividend yield higher than I can earn in a bank account? No, $0 is a current yield of 0%.
  • Option trading available for the lowest risk entry possible? Yes.

JetBlue Airways Corporation (NASDAQ:JBLU) is a $1.65 billion market cap company. JetBlue Airways Corporation provides passenger air transportation services in the United States. As of December 31, 2010, it operated 650 daily flights to 63 destinations in 21 states, Puerto Rico, and Mexico; and 10 countries in the Caribbean and Latin America through a fleet of 115 Airbus A320 aircrafts and 45 Embraer 190 aircraft.
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JetBlue Airways Corporation was founded in 1998 and is based in Forest Hills, New York. JBLU reported 1st qtr 2011 earnings of $0.01 per share on 4/21/11 The next reporing quarter estimated mean earnings is $0.08 per share. The low estimate is $0.04 and the high is $0.12 per share. The current trailing twelve months P/E ratio is 17.51 (ttm) and the forward P/E ratio is 11.47

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  • Rising revenue year-over-year? Yes, $3.41 for 2010 vs. $ 2.93 billion for 2009.
  • Rising earnings year-over-year? Yes, $97 million for 2010 vs. $61 million for 2009.

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  • Rising EBITDA year-over-year? Yes, $161 million for 2010 vs. $104 million for 2009.
  • A dividend yield higher than I can earn in a bank account? No, $0 is a current yield of 0%.
  • Option trading available for the lowest risk entry possible? Yes.

United Continental Holdings, Inc. (NYSE:UAL) is a $7.52 billion market cap company. United Continental Holdings, Inc., through its subsidiaries, engages in the provision of passenger and cargo air transportation services
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United Continental Holdings, Inc. was founded in 1934 and is headquartered in Chicago, Illinois. UAL reported 1st qtr 2011 earnings of $-0.41 per share on 4/21/11. The next reporing quarter estimated mean earnings is $1.61 per share. The low estimate is $1.36 and the high is $1.95 per share. The current trailing twelve months P/E ratio is 46.98 (ttm) and the forward P/E ratio is 4.76

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  • Rising revenue year-over-year? Yes, $21.13 for 2010 vs. $ 14.7 billion for 2009.
  • Rising earnings year-over-year? Yes, $253 million for 2010 vs. $-651 million for 2009.

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  • Rising EBITDA year-over-year? Yes, $250 million for 2010 vs. $-672 million for 2009.
  • A dividend yield higher than I can earn in a bank account? No, $0 is a current yield of 0%.
  • Option trading available for the lowest risk entry possible? Yes.

US Airways Group, Inc. (LCC) is a $1.47 billion market cap company. US Airways Group, Inc., through its subsidiaries, provides air transportation for passengers and cargo. It offers scheduled passenger service on approximately 3,200 flights daily to 200 communities in the United States, Canada, Mexico, and Europe.
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The company was founded in 1981 and is headquartered in Tempe, Arizona. LCC reported 1st qtr 2011 earnings of $-0.41 per share on 4/21/11 The next reporing quarter estimated mean earnings is $1.61 per share. The low estimate is $1.36 and the high is $1.95 per share. The current trailing twelve months P/E ratio is 3.47 (ttm) and the forward P/E ratio is 4.84.

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  • Rising revenue year-over-year? Yes, $10.61 for 2010 vs. $9.35 billion for 2009.
  • Rising earnings year-over-year? Yes, $502 million for 2010 vs. $-205 million for 2009.

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  • Rising EBITDA year-over-year? Yes, $502 million for 2010 vs. $-243 million for 2009.
  • A dividend yield higher than I can earn in a bank account? No, $0 is a current yield of 0%.
  • Option trading available for the lowest risk entry possible? Yes.



Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in JBLU, LCC, LUV, UAL, AMR, DAL over the next 72 hours.