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I have written several airline related articles and I must be among the biggest bears in the industry. It seems like the whole industry can’t get much right and when they do, it doesn’t last for long. Everything from airport security (which should be operated by each airline, not the government) to the flight security officers (aka flight attendants) more concerned with hanging out in the galley telling each other how bad they have it than providing quick, friendly customer service with a smile. Only in international business class can a traveler find the service rises above what can be expected at the local Wal Mart (NYSE:WMT). With well over 500K air miles (many in countries other than America) I have a pretty good understanding of what air travel is like. As a stock analyst I have a very good idea of what the companies are worth. As a result of the experience first-hand and looking at the financial statements I remain very bearish on the industry.

Click here to read my article I wrote in late April. In this article I reviewed the airline industry and went into detail about six major airlines. My conclusion was shorting six airlines would be the correct path to take. I have taken another look at the airlines and I see all six would have been profitable shorts. Airline Profits Have Been Grounded; Time to Short?

Recently, JetBlue (NASDAQ:JBLU) has ripped higher and is up once again above the 200 day moving average of about $5.06 a share. The 60 and 90 day moving averages have turned up and one may conclude the stock may keep moving higher. Even fellow contributor Adam Levine-Weinberg in an article recently published states the bullish case for airlines and especially United Air (NYSE:UAL) and Delta Air (NYSE:DAL).

I have shorted United several times this year, and while I don’t normally let poor customer service influence my investing, I have with United. I have found United to be uniformly poor (from ticketing, phone support, check in and even the United Club Lounges ... the United Club in La Guardia has to be the worst club in the world I have ever stepped foot in). As a result I reviewed United and shorted the stock and will likely do again if the price moves much higher (currently near the 200 day moving average).

While I am willing to short United on movements higher in price, JetBlue has moved high enough for me to short it. With a PE of well over 20 (making it expensive by my standards for any company) and what I consider a currently near impossible path forward for the stock to appreciate further relative to the risk. With a trailing PE of about 22 and forward PE of about 11, it becomes very clear the market is not pricing in any future growth, but rather consolidation and hardship for investors.

What the airlines need in order to increase revenue is for the economy to pick up. The problem with the economy picking up is it is just as likely as not to pick up in Asia as much or stronger than North America. This will translate in higher fuel costs, higher ticket prices, lower demand and likely same to lower margins. Any improvement in the world economy could end up being detrimental and becoming a new peril for the U.S. airline industry and NOT the benefit many may believe. With record low interest rates and budget deficits as far as the eye can see, it is quite possible the world economy could start growing again without the United States taking part. If China and others decided it’s in their interest to buy assets and not U.S. debt, the U.S. may find an economy that is not moving, with high unemployment, high interest rates and more pain for the airlines.

It’s very difficult for me to picture a scenario where the airlines actually do start to improve the return for investors and if the history of airlines leaving investors twisting in the wind from the past is any indication for the future, one has to wonder why anyone would invest in JetBlue at the current valuations.

JetBlue Airways: Forward PE 10.88

United Air: Forward PE 3.98

Southwest Airlines Co.: Forward PE 10.82

Delta Air lines Inc.: Forward PE 3.98

Southwest currently also has what I consider a high PE multiple for the industry, but they also have one of the best operated airlines in the industry, are over four times larger by market cap, and has a brand that is better known. This makes in my opinion JetBlue very expensive by comparison and setting up several different investment possibilities.

One option I am reviewing is what is known as a “pair trade." A pair trade is the buying of one stock and selling another related stock to hedge with. In a nutshell a pair trade allows the investment to focus on the actual stock you want to trade long or short with a mitigation of industry movement risk. If the JetBlue stock price falls relative to the price of Southwest, the investment is profitable and if not the investment will likely lose money (or remain breakeven).

Other possible methods with JBLU include shorting the stock outright or using options. I can short call options and try to collect premium, but just like with shorting the stock, I expose myself to unlimited risk if JetBlue is able to pull a rabbit out of the hat. I can also buy put options with the thought of capitalizing on a price in stock that is greater than the time decay of the put options.

After reviewing Southwest, JetBlue and their options, I decided to pass on the pair trade for now, and focus on buying JetBlue put options due to the relative low priced premium. I bought (and paid the spread which I don’t do often) and I am currently bidding at the bid price for more January $5 strike price put options with a double as the goal price target. The liquidity is not terribly high ( I make up a large amount of today’s liquidity) so this is an advanced option trade. JetBlue will likely have to trade below $5 a share within the next couple of weeks which I put the odds and well over 50% of happening. Because the pay-off is a double if correct and if incorrect it is unlikely I will take a total loss, I only need odds greater than 50% to make the investment mathematically correct.

Reviewing AMR Corporation aka American Airlines (AMR), I am not what one would call very bullish, but at the same time if the current shares of stock do not get cancelled and a new issue granted, the shares may have some real value.

AMR is currently on the NYSE Threshold securities list for December 16, 2011. What this means is that so many traders, investors and money managers want to short the stock that borrows are not able to be found as much as the demand to short the shares currently exists. As of November 30 2011, the amount of shares shorted was reported to be 58.3 million shares out of a float size of 322 million shares. Almost one out of every five shares is short (about 20% of the float) and short sellers are looking for more shares to short.

Short sellers don’t get it right every time, but a very important rule to follow when looking for investments is to consider short sellers the “smart money." If you’re still holding onto shares of AMR after the fall last month, you may want to review all the material possible to see if there is a path to the other side. If you can’t figure out how the airline is going to move the debt to below assets, you might as well take what you can now before it has the “drop” of another 60% in a day as so many bankruptcy stocks do after the first gap down. If you can figure out a path, of course it may be worth to hang on to some or all the shares. Remember there is no rule that says you have to do all or nothing. Selling off some shares to mitigate risk is often the best move. This week I plan on reviewing every document I can get in front of me to see if AMR may be the next Northwest Airline stock or not.

If AMR does appear to hold some real value I will follow up with another article and pick up a few shares, but it would be a short term play. Just like United Air, JetBlue and Delta Air, I believe it’s better to look for shorting possibilities than to invest in this industry.

I use a proprietary blend of technical analysis, financial crowd behavior and fundamentals in my short-term trades, and while not totally the same in longer swing trades to investments, the concepts used are similar. You may want to use this article as a starting point of your own research with your financial planner.

Disclosure: I am short JBLU.

Additional disclosure: I may long AMR over the next 72 hours. I may long LUV as a pair trade hedge along with shorting more JBLU over the next 72 hours. I may short UAL over the next 72 hours.

Source: Is JetBlue Losing Altitude, And Will AMR Go To Zero?