Are Airline Stocks Poised to Recover?

Includes: AAL, DAL, JBLU, LUV, UAL
by: Stone Fox Capital

This is the sixth and final article in a series focusing on the plights of certain sectors since they peaked prior to the financial crisis in 2008. All of the sectors covered have struggled mightily to recover to pre-crisis levels, while other stocks and sectors have surged on to new highs. So far the series has covered Steel Producers, Engineering & Construction, Women's Apparel, Life Insurance and Large-Cap Tech.

This article focuses on the airline sector, and will be the first sector in which Stone Fox Capital neither owns a stock or expects to purchase a stock in the near future. Airlines have long been the suffering industry in the US market, and that doesn't appear to be changing. While several of the larger companies were able to reduce debt via bankruptcies in the 2000s, the companies still struggle with heavy competition and have a difficult time with passing on higher costs. The fear of ever higher fuel costs down the road and strong labor unions latch onto any profits and make the industry uninvestable.

What amazes me, when reviewing the history of the sector, is the great struggle for profitability inherent in the industry. After all, package delivery companies like United Parcel Service (NYSE:UPS) and FedEx (NYSE:FDX) provide services that would seem similar to the airline industry, and they have a mostly profitable history. Delivering packages versus passengers seems similar enough. The glaring difference, though, is that the package delivery sector has two primary competitors, while the passenger delivery sector has typically had at least 5-10 national competitors, with numerous regional providers undercutting prices. That level of competition just doesn't exist in other money-losing sectors.

The sector generally peaked in January 2007 and has struggled for four long years, hardly reclaiming any of the massive stock declines. Major consolidation has taken place in the sector increasing our interest, but considering that a relatively new sector, like wireless, will only have two strong competitors and one weak provider, any investor can quickly understand why this sector struggles to profit. A cozy duopoly beats stiff competition any day of the week.

Below is a list of the leading airlines:

AMR Corp. (NASDAQ:AMR) - operates passenger and freight services to 250 cities with 3,400 daily flights. AMR has a market value of $1.8B with 2011 estimated revenue over $24B. The stock peaked on January 17, 2007 at $41 and currently only trades for $5.25. The stock is down 87% from those highs, providing for a whopping 680% gain if it ever recovers those losses.

Delta Air Lines (NYSE:DAL) - provides scheduled air transportation for passengers and cargo serving 357 destinations. DAL has a market cap of $7.7B with estimated revenue approaching $35B. The stock peaked on July 18, 2007 at $21.80 and now trades for $9.15. Stock is currently down 58% from that peak.

Jet Blue (NASDAQ:JBLU) - provides passenger air transportation operating 650 daily flights to 63 destinations. JBLU has a market cap of $1.8B with revenue estimated to approach $4.5B in 2011. The stock peaked at $17.02 on January 16, 2007 and now trades at $6.00. The stock remains down 65% from that peak.

Southwest Airlines (NYSE:LUV) - Operates as a passenger airline with 548 aircraft providing service to 69 cities. LUV has a market cap of $8.6B with estimated revenue of $17.8B. The stock peaked at $18.20 on July 28, 2006 and now trades at $11.50. The stock is only down 37% from that peak, providing the smallest decline in the list.

United Continental Holdings (NYSE:UAL) - engages in the provision of passenger and cargo air transport services. As of February 24, 2011, it operated a total of approximately 5,675 flights a day to 372 airports on continents. UAL has a market cap of $7.7B with a 2011 revenue estimate of $38.6B. The stock peaked on January 16, 2007 at $51.57 and now trades for $22.30. Stock is down 57%.

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

Disclaimer: Data sourced from Yahoo Finance. The information and data is believed to be accurate, but no guarantees or representations are made. The information contained herein is for informational purposes only and should not be relied upon as advice.