Cramer on BloggingStocks: Airlines can't survive oil at $120

Posted Apr 29th 2008 9:09AM by Jim Cramer
Filed under: Industry, Apple Inc (AAPL), Market Matters, Goldman Sachs Group (GS), Eaton Corp (ETN), Delta Air Lines (DAL), Stocks to Buy, Stocks to Sell, Cramer on BloggingStocks

TheStreet.com's Jim Cramer says they can't be profitable with this huge cost – it's time to move on.

Here's a revelation. The airline industry is disappearing right before our eyes. And it doesn't even matter. They can merge all they want, they can try to cut costs through synergy, but the business can't survive $120 oil. The variable cost is 35% of their expense. That's not tenable and it is going higher. Fares have to double to make it up. That's just not tenable. The Dreamliner's a nice savings, but this American industry won't get there in time to be saved by it.

Last week we saw the big give-up, the departure of even the longest-term investors. The stocks are signaling that most of them will have to restructure through bankruptcy. They have done it before, but this time it doesn't matter. The fare increases have to occur, and they are such that the airline structures can't be profitable. It is one of those industries that can't stay afloat without massive federal subsidies, and that can't happen.

I have hated the airline stocks ever since 1985 when I recommended Delta (NYSE: DAL) (Cramer's Take) and my clients promptly dropped 50%. I reiterate that after the tremendous declines these stocks have, they are still worth avoiding. Don't be tempted to pick up these stocks if oil "swoons" down to $115. The airlines will rally, but they will need to do every bit of financing possible if a rally occurs.

This group has held an endless fascination on Wall Street from the first days it traded, yet the industry itself has done nothing but accumulated losses since it started. Find another industry to invest in! This one is not investible!

Random musings: I continue to believe that Apple (NASDAQ: AAPL) (Cramer's Take) can go MUCH higher. It is a very strong story in a group without many good stories. ... I prefer industrial "techs" like Eaton (NYSE: ETN) (Cramer's Take) to any of these techs. ... I firmly believe that Goldman's (NYSE: GS) (Cramer's Take) having a moment where it might be taking huge share and that's why it is up nicely. ... People really are buying retail off the tax rebate checks. ... The McMahons got the bum rush in yesterday's New York Times. It said that the CEO and chairman of World Wrestling Entertainment (NYSE: WWE) (Cramer's Take) enriched themselves with a big dividend boost. WRONG! They boosted the dividend for the other shareholders only, not themselves. That's why I said they are so pro shareholder on the show! Ouch!

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Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer was long Goldman Sachs.

Tags: aapl, airline industry, AirlineIndustry, apple, dal, delta, eaton, etn, featured, goldman sachs, GoldmanSachs, gs, jim cramer, JimCramer, wwe

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Reader Comments (Page 1 of 1)

4-29-2008 @ 11:23AM

Michael Schneider said...

Airline stocks are traditionally unloved on Wall Street and there are many famed investors like Warren Buffett who talk against them because the industry is bad-- competitive, hostage to regulation, safety and terror concerns, hostage to fuel prices, usually hostage to high labor costs and unions. With one recent exception (buying Airtran as a hedge on oil stock holdings) though, I have always made money in airlines. The airline industry is a great area to find unloved stocks. Southwest Airlines when it first started growing stayed under the radar for years because it was in an area where no one was looking. Southwest is still a good stock to watch and it might indeed benefit from the problems of its competitors, from the economic stimulus package and from a rally in the dollar and pullback in oil prices. It will be a survivor at least with its good management and business model. I have made money at various times trading the major airlines, buying AAR- the preferred stock of American Airlines, Lan Air in Chile and smaller US airlines from time to time. So right now no one likes airlines but legendary investor Jim Rogers (see items including the latest item in Channeling Jim Rogers- yellow label, top- at http://www.Barrelomoney.com) was correct a couple years ago when he was recommending airlines and he is now going for many foreign air carriers and all the Chinese airlines. Why is Jim Rogers buying? Travel is still going strong, international economies are strong, international flights are more profitable and Chinese are joining the jet set travel age for the 1st time ever. The major US carriers face a slowdown and formidable challenges at the moment but the global situation is quite different right now.