Continental Airlines' Price Drop Creates Opportunity

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Includes: AAL, JBLU, UAL
by: Jack Miller

Continental Airlines (NYSE:CAL) is sitting on its 52 week low despite the tremendous turn around story. Seldom do you get the chance to buy a stock at less than half the market PE ratio when it is about to move into the best of times for its business. Fares will go up and up as business travelers "crowd out" the casual flier.

In a filing with the SEC the company reports that "demand is strong" and that advance bookings are well ahead of the same time last year. CAL honors the price of advance bookings. Therefore, with fares going up multiple times each year, regular passengers are booking farther in advance. Advance bookings make the task of maximizing yield much easier.

For years, I gave very significant discounts to repeat customers who booked their beach condos early. The beach condo business is a first cousin to the airline business. We were able to dramatically raise our rental rates during the "prosperity phases of the business cycles. I do not have the precise numbers available but I still laugh about how psychologically tough it was when our weekly rate for a big condo went above $1,000. One of our partners said that we would never be able to rent the condos for $1,000 per week. A few years later we rented the same units for $3,500 per week.

This is what is about to happen in the airline business. A flight from NY to Houston has gone round trip from $400 to $2,000 at the peak all the way down to $150 if you searched the internet and now back to $400. This fare will go back to around $2,000 per seat at the peak of demand. Airline seats, like condos, are wasting assets. Once the plane takes off with an empty seat, the revenue has been lost forever. If a furniture store misses a sale, it still holds the inventory for the next sucker to come along. The airline business is tough in the sense that the full price of the product is lost if not sold.

On the other hand, during times of peak demand, that seat is a one of a kind master piece. If the customer at the furniture store finds his chosen purchase is sold out, another piece can be ordered. The furniture does not have the same type of time and place utility as the airline seat. When supply is limited, the high bidder gets the seat and the other fellow stays home or takes three legs and a full day to make a 3 hour flight.


CAL reports that fuel cost have increased 13 cents since its October forecast. The new estimate is $2.48 cents per gallon. A top analyst reports that fare increases on international flights has totally off set the additional fuel costs. Earnings for the next quarter will be down because domestic fares are determined by discount domestic carriers. Please note Thursday's purchase of 20+ percent of JetBlue (NASDAQ:JBLU). The domestic carriers are scrambling for international partners. The domestic carrier with no long haul flights to feed is going to have a very difficult time in the years ahead.

GERMAN CARRIER TO BUY 20+% OF JETBLUE.

I have run, but the consolidation continues. Deals are getting done such that "oligopolies" are being legally formed. JetBlue is just the latest example. CAL partners with 227 other airlines. AMR Corp (NASDAQ:AMR) just made a deal with the big Israeli airline. A lot of cities will be connected to Tel Aviv though this partnership. AMR will share in the traffic generated. The international boom is just getting started. CAL gets 47% of its revenues from over seas!

IT IS TIME TO STRETCH TO THE LIMIT, TO BACK UP THE TRUCK, IT IS TIME TO BUY!