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Jim Cramer has said it, the Wall Street analysts have said it and some of the most respected money managers have said it: Don't own an airline stock! Apparently people are listening. They are listening so attentively that the airline prices have fallen drastically. Possibly even too drastically.

That's not a very popular train of thought right now with oil prices nearing $150 a barrel. However, with the prices of the airline stocks so low, it is hard for the long term investor not to consider purchasing them.

Not all airlines are created equal, however. There is one problem with the pending merger between Northwest Airlines Corporation (NWA) and Delta Airlines Inc. (DAL) that should keep likely investors away. That problem is that if the market were to get wind of even the slightest possibility of a threat to this merger then these already depressed stock prices will become... well, even more depressing.

AMR Corporation (AMR) the parent company of American Airlines, was one of the few airlines that was able to fight off bankruptcy in the early 2000's and it seems like they may now pay the price for that. Their efforts, however valiant, to keep the company out of bankruptcy protection means that they now have mounds of debt and little cash with which to pay off this debt. For their most recent quarter ended March 31, 2008 they reported only a meager 208 million on the balance sheet with 9.57 billion in current liabilities to pay off and 9.3 billion in long term debt. They were able to earn 5.7 billion in revenue on 4.8 billion cost of revenue meaning that they were able to earn 1.1875 dollars for every dollar spent, but they still come out with a net loss of $1.32 a share. This is one airline that a prudent investor would not want to go near despite its attractive price.

UAL Corporation (UAUA) the parent company of United Airlines much like AMR Corporation is drowning in debt. For their most recent quarter they reported 8.2 billion dollars in current liabilities and 7.3 billion in long term debt. They do have some cash on hand in the amount of 2.4 billion dollars, but the most horrifying fact that about UAUA that is likely to scare off any potential investor is their cost of revenues. For their most recent quarter they were able to earn 4.7 billion in revenue, but their cost of revenue was 4.6 billion. No company can operate under margins like these for too long. Investors be warned!

It is indeed true that there are some airlines that investors should steer clear of, but there are also a few that might be worth owning at such attractively low prices. There are three in particular: US Airways Group (LCC), Continental Airlines Inc. (CAL) and Alaska Air Group (ALK). These companies boast some decent revenues to cost of revenues ratios for their most recent quarter at 1.368, 1.119 and 1.694, respectively. All three of them also have adequate cash on hand in relation to the size of their business that they all can fight off bankruptcy despite high oil prices for at least two years. LCC has 1.9 billion in cash, CAL 2.2 Billion and ALK 212 million. The truth still remains that the airline industry is not a profitable one at this point, but still these three stocks look like a safe long term investment at bargain basement prices right now.

The biggest factor that every airline has to worry about is the price of oil. With a price of close to $150 a barrel, no airline can be expected to make profit. If this $150 price were sustained for any period of time then eventually all of the airlines would fall into bankruptcy if regulators were not to step in. There seemed to be no stopping the oil run-up until just recently when the first signs of downward pressure started to show themselves. Not only will $150 be a major resistance level for oil to break, congress and the CFTC are now investigating the role of speculation in the oil market. These occurrences may be the beginnings of a pullback in the oil market meaning that the airline stocks may see a short term run-up due to their "inverse of oil" movement.

The bottom line is that airlines are not making money right now, but with prices so low it is hard not to consider buying some of the healthier airlines. An airline with the ability to fight off bankruptcy for two years or more means that an investor can pick up a healthy amount of that airline's stock and then hold on to it until the oil market straightens itself out and the airlines return to profitability. For the traders out there, look for oil to hit near $150 a barrel and then do a pullback meaning that the airlines will see a temporary bounce just perfect for option traders.

Disclosure: No positions

Source: Airline Stocks: Where Value Investing Takes Flight