BioInvestor

Airline Stocks: Where Value Investing Takes Flight

I think trading airline stocks is the only way to generate any kind of return. It would surprise me if AMR went into C11, but I think in the short term--say the next year or two--it's not a bad trading vehicle for those that are looking for short term returns.


On July 8, Mark S. wrote:

AMR will be a good short-term buy - today it went up 11+%. You trade these things. You don't invest in them. I think some of these airline stocks will be good bets against oil stocks as oil prices drop. I just wouldn't put all of my eggs in one basket and I wouldn't keep my money in them for long-term. Still, if you're looking at a safer play against oil, DUG looks like a good ETF

Airline Stocks: Where Value Investing Takes Flight

Sad but true: none of the legacy carriers has. Southwest isn't part of this conversation.


On July 8, ProfessionalHFAnalyst wrote:

If memory serves, no US airline has ever returned its cost of capital. Even in the good times. Until there is a cartel/monopoly established where tickets can be sold at multiples of current prices, I would avoid this sector at all costs.

Airline Stocks: Where Value Investing Takes Flight

I want to make a couple of points on AMR to clarify the statements made in the article. I think that the analysis of the financial statements doesn't paint the entire picture. (I do think at some point it's probably in AMR's best interest to reorganize.)

While AMR has under $1 billion in cash, it has almost $4.9 in cash equivalents. The company has reduced its accounts payable by $5 billion: I am waiting to see exactly why this step occurred. The company is burning cash, but is solvent. Contrast this picture with the one five years ago, where shareholder equity was negative.

The statement that AMR is drowning in debt isn't wholly accurate, since the legacy carriers are all highly leveraged. An analysis of all the legacy carriers shows that AMR is in a better position than many of its peers.

In contrast, UAUA has weaker cash (and cash equivalent) position than AMR. Looking at income, the company performed worse than AMR in the latest quarter. Just like AMR, UAUA is bleeding cash.

Overall, AMR is in a better position than is UAUA.

LCC is an interesting case as it definitely benefited from its reorganization. The company still has challenges with the US Airways/American West merger. I haven't looked at the June numbers for LCC, but its income is trending in the wrong direction. Long term, LCC has a poor hub structure. LAS and PHX are areas of growth, but PHL isn't a good international gateway; PIT is a problem for the airline. CLT has advantages in terms of traffic, but it too isn't a good international gateway. Long term LCC, in my opinion, isn't going to be a winner.

Just like AMR, CAL has pretty stable revenues despite current market conditions. The company has, arguably, the strongest balance sheet of any of the legacy carriers. Its EWR hub is an excellent international gateway; IAH is a strong hub for Central and South America. CLE doesn't appear to add much in the way of value for the company. CAL lacks exposure on the west coast--it needs a hub. Of course, since the company will be one of the first to take delivery of the B787s, whenever they're ready, the airline will expand into Asia from its IAH and EWR hubs. CAL leases most of its fleet--it owns some regional jets. It's more difficult for CAL to park aircraft. It also can't raise funds against equipment as easily as, say, UAUA could. CAL is unlikely to enter C11, but leasing poses some downsides. CAL also owns many of the aircraft used by Express Jet (XJT), a company spun off from CAL a few years ago. Like CAL, XJT looks to have a strong balance sheet and relatively stable income; however, the company has very serious cash flow problems. Its stock price has collapsed (bigcharts.marketwatch....); the company should be delisted from the NYSE later this month or early in August. If XJT fails, CAL will be stuck with a number of non-performing assets: Embraer regional jets, which won't be helpful to its cause. CAL is, IMHO, still the strongest of the major, legacy carriers.

ALK has a weakening cash position; it does have relatively stable income and a relatively healthy balance sheet. Its cash position is actually weaker than many of the legacies. ALK is in a relatively good market where it has been able to compete quite successfully with LUV. It has done well and will likely continue to do well in the future.

The lesson learned from XJT, which is a great lesson for the airline industry, is to take a look at cash flow. The balance sheet is the past; the statement of cash flows is the future. I don't think that any of the legacy carriers represents a good investment opportunity right now. None of them is safe. At current oil prices--and the trend in oil prices--each carrier is in peril. My suggestion is to wait for the first legacy carrier to enter C11 (it would well be LCC), which would be good for the rest. Of the three listed in the article, only ALK and CAL are worth consideration from a committed investor. I wouldn't buy either right now; I would wait for major calamity in the industry, then purchase.