Can The Airlines Continue To Fly High?

by: Bill Maurer

On Tuesday, US Airways (LCC) led a major rally in the airline sector as it announced positive September bookings and continued its plan to reduce seat capacity. CEO Scott Kirby said that despite what he hears everyday on television, he has yet to see any signs of a global economic slowdown. Bookings for the third quarter are flat to up over last year's period, and increased prices have the companies looking for mid single to low double digit revenue growth. On Wednesday, these companies continued to rise with the overall market, but that brings up a big question. Have you missed the rally, or is this just the start of a boom for the industry?

Below is a table that describes the rise we've seen over the past two days. Remember however, the Dow dropped 140 points off its highs into the close, so most of these airlines lost anywhere from 1.5% to 3% off their day's high.

Symbol Monday's Close Wednesday's Close Change 52-Week Low 52-Week High
LCC $4.85 $5.74 18.35% $4.68 $12.26
AMR $3.27 $3.55 8.56% $3.17 $8.98
DAL $7.38 $8.37 13.41% $6.41 $14.54
UAL $17.96 $20.13 12.08% $15.92 $29.75
LUV $7.96 $8.50 6.78% $7.79 $14.32
JBLU $4.16 $4.40 5.77% $3.86 $7.60
ALK $54.28 $59.54 9.69% $44.86 $70.61

This quarter is looking good for the airlines, which may come as a surprise to many who think there is an economic slowdown. Also, Oil and Brent are still around the $90 and $110 levels, respectively, so airlines aren't getting any help there. This is fueled by the promise of top line, revenue growth. It remains to be seen whether or not these numbers can be translated to the bottom line, and I for one, do not think so. Just take a look at what analysts think. Despite revenues seen up 5-10% year over year for the quarter, most EPS estimates are down 30% to 50% from last year's period.

Let's look at the table again. Before this rally, US Airways, American (AMR), and Southwest (NYSE:LUV) were all close to 52-week lows. Thanks to the rally, these stocks are now well off their 52-week lows, anywhere from 9% to 33%. The shorts love these stocks, and if this was just a dead cat bounce, they are probably salivating at the opportunity that was just handed to them.

I'm not a big fan of airline stocks, but that doesn't mean I will never buy one. They just seem to get hit hard for a while, and then have a quick pop like we've seen the last two days. Unfortunately, more often than not, those rallies are short lived, and they start to head lower again. If you were lucky enough to catch this rally, good job, you were in at the right time, but you might want to take some profits if you haven't already. I would definitely take a look at these if they drop back down to pre-rally levels, but I just can't recommend getting into them after this run up.

I think we are in an economic soft patch, and I don't think that bodes well for this sector. And if you remember late 2008, you realize that oil went down below $40 which was a welcome sign for the airlines. Oil isn't dropping right now, which may mean that the economy is stronger than most believe. Or we may be weak with high oil prices. All I know is that in December of 2008 I paid $1.35 for a gallon of regular gasoline, and it's $3.45 today. That cannot be good for the airlines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.