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The Smart Profits Report: Issue #459
Tuesday, September 25, 2007
The Airline Sector: Airlines Are Headed For The Bermuda Triangle… Time To Bail Out?By Marc Lichtenfeld
Senior Analyst, Mt. Vernon Research
We’ve all had days where, through no fault of your own, you end up losing a ton of time and are then forced to play catchup. We’ve all had days where frustration is rampant, yet there’s nothing you can do. Welcome to the airline sector - where experiences like this seem more prevalent these days.
Just recently, for example, I got stuck for 7 hours at Los Angeles Airport, with little alternative but to wait out the delay. To cap it off, I got sandwiched between two chatterboxes when the cross-country flight finally got off the ground (you’d think they’d be tired by that time!)
The airline sector has a trio of tough problems facing it right now - and stocks look ready to tumble. Here’s how you can cash in…
Crude Oil Prices Up… Passenger Numbers Down
Obviously, the main problem that all airlines are struggling to deal with is rising oil prices. With crude hovering at all-time high around $80 a barrel, the airline sector is feeling the squeeze.
But perhaps more importantly, passenger numbers are down, which is hampering airlines’ ability to offset those high fuel costs. Airline load (the percentage of seats sold) was 86.6% in July and 84.4% in August. Now, if you traveled over the summer, you might be surprised at those figures, since it seemed every flight was overbooked and there were long lines at every Starbucks, pizza place or newsstand.
But this summer was a miserable time to fly - and the media were chock full of stories that illustrated the problems. Heck, you know the situation is bad when an organization is founded to specifically fight for passengers’ rights in the wake of huge delays and horror stories of angry passengers stuck on the tarmac for hours with no food, water or updates.
And the next few months don’t look promising…
American Airlines Sneezes… And The Airline Sector Catches A Cold
While the numbers aren’t in yet for September, I’ve noticed many more empty seats on several flights that I’ve taken recently. Passenger traffic in airports appears lighter, too.
With all the negative press and woeful experiences of many travelers over the past few months, it may be that the mess is persuading many folks to nix air travel if a destination is reachable by car or other means instead. Combine that with higher expenses and that’s a recipe for tighter margins.
Just yesterday, American Airlines (NYSE: AMR) shares suffered their worst one-day drop in four years (14.3%) after the company issued gloomy third-quarter projections. It expects passenger unit revenue to rise between 4% and 5%, while revenue per available seat mile will rise between 3.7% and 4.7%. Both numbers were below expectations. In addition, the airline said it expects costs to rise, as it refurbishes aircraft, cuts capacity and aims to improve passengers’ experience.
With a major carrier like AMR reporting disappointing results, it’s logical to expect several of the others to follow suit. Most flyers aren’t loyal to one particular airline. They fly whichever carrier has the best rates or most convenient flights.
Turbulent Technicals Could See Sector Dip Under $40
And it wasn’t surprising to see AMR’s news trigger a widespread selloff in most of the airlines on Monday. And while the airline sector rebounded a little today, the technicals look ugly. Take a look at the chart of the AMEX Airlines Index (AMEX: ^XAL) - it’s making lower lows, which is never a good sign.
So where to from here for the turbulent airline sector?
I expect the index to slip back to support at $40. But with oil prices rising in what is usually a quieter period for airlines before the busy holiday season, I wouldn’t be surprised if the index breaks that support level - particularly if the broader stock market (still under some pressure) turns south. In that case, we could see a serious selloff.
I expect demand for flights to slack off, at least until the holidays. Individual names that look particularly vulnerable to me include Continental Airlines (NYSE: CAL), Northwest Airlines (NYSE: NWA) and US Airways (NYSE: LCC).
I’m not necessarily advocating an outright short of the airline sector. If the overall market remains strong, the downside could be fairly limited. But if we see a correction, I suspect the airlines could be hit hard. If you like short selling or buying puts, keep the airline sector on your radar.
Hoping your longs go up and your shorts go down,
Marc Lichtenfeld
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Today’s Smart Profits Action Center
- American Airlines isn’t the only carrier with rising costs. This morning, leading low-cost carrier Southwest Airlines said its third-quarter costs will rise faster than revenues, due to expenses from an employee buyout program. Southwest said employees with 10 years service, or those who have hit their pay threshold, would receive a $25,000 payout, plus medical and dental benefits, in return for leaving the company voluntarily. The $25 million pre-tax charge is expected to tack on 4% to 5% to unit costs - around double Southwest’s projected 2% rise in revenue per available seat mile. However, the program is expected to benefit long-term growth, with annual savings of $20 million through 2012.
- Despite its third-quarter woes, American Airlines received a boost today, with the news that it has received approval to start a new Chicago-Beijing route next year. Delta will also operate a new Atlanta-Shanghai route and United will fly between San Francisco and Guangzhou. Right now, while the Chinese market is jammed domestically, the international market is underserved and capacity and competition is hotly contested. The U.S. Department of Transportation also announced that American, Northwest, Continental and US Airways have been cleared to operate four new daily flights to China, starting in 2009, aimed at increasing the number of daily flights between the U.S. and China from 10 to 23 within five years.
- The new October Xcelerated Profits Report issue is now online - complete with the “anti subprime cure” recommendation from Investment Director Karim Rahemtulla, a stock that could hand subscribers a double, as the credit crisis worsens. And for just $49 a year, this team of professional traders will show you how to trade stocks and options just like the pros do every day, in order to accelerate their profits - and guarantee an 80% win rate, too. Click this link for more details.
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