As an investor, I really despise the airline sector at the moment. These companies are notorious for being poorly run cash-losing machines.
Now, in the midst of a deep recession and too many airplanes flying too few customers, airline stocks can be expected to be poor performers in the short run and maybe longer.
I made the sector part of my Top 10 Stocks to Avoid in 2009. The main thesis, aside from the obvious recessionary issues, was that oil prices would resume their climb at some point in 2009.
Specifically, I suggested investors avoid Delta Airlines (NYSE: DAL) and United Airlines (NASDAQ: UAUA).
Higher oil prices directly impact the bottom line of the air carriers. The higher oil goes, the more difficult it is for the airlines to make a profit. This summer, with oil prices hitting $150 per barrel, the future of the group was in peril.
That said, the reality of higher prices caused the group to make some necessary changes that included mergers, reduced capacity and important surcharges. The operating environment had the potential to bring much needed discipline to the carriers.
Unfortunately, higher fuel prices did not last long enough to bring enduring change to the group. As prices fell, airline stocks rallied. It was looking good until the economy tanked.
With the recession, oil prices suddenly mattered less. Instead, the focus was on the consumer and business traveler cutting expenses during a contraction.
The airline sector loses if the economy rallies, as such a state brings higher oil prices and lower profit. If the economy stalls, the sector loses customers and revenues fall to unsustainable levels.
The point is that it is no-win situation for the group.
The fact that oil prices have fallen from their peak is a mirage. It would have been far better for the industry to endure its short-term pain for the longer-term gain. Instead, the group was given a reprieve.
Or was it?
United Airlines today announced it had lost $9.91 billion or $9.91 per share. The reason for the huge loss was the erosion in value of oil hedges placed when prices were seemingly increasing on an hourly basis.
No benefits to low oil prices here. UAUA's stock was down big on the news. At one point, shares were down more than 13%, although the stock recovered to close only down 6% or so.
There will be cuts in capacity and jobs, including white collar management. The big airlines need to scale down in a major way and they may be doing just that.
As a result, I expect these shares, including UAUA, to languish as they go through this process. Stay away.
Jamie Dlugosch is a contributor to InvestorPlace.com.
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Reader Comments (Page 1 of 1)
1-22-2009 @ 1:17PM
BHarrison said...
The airline industry has basically been operating at a loss for several decades now. So, it amazes me that ANYONE would invest in airline stocks, except for short sellers . . . and there has to be a "bottom" to even that, doesn't there?
As I see it, there has to be an instillation of INTEGRITY into all of our business affairs. The dmage that has been progressively done to our markets and industries by the blatant "gamers" has done its upmost damage and taken us to the bottom of the barrel.
There is going to have to be a revolutionary return to sound business practices and accounting standards and practices. "Creative accounting practices" are just another name for FRAUD.
Many "innocent" investors are going to be ruined financially . . . the average investors, retirees, etc. . . . but this is unavoidable unless we become a socialized country. And how can a socialzed country support the excesses of CEOs, CFOs and other uppermanagment "earning" TENS and HUNDREDS of millions of dollars in "compensations"? That simply is not a homogeneous mix . . . it will not work.
So, basically the wealthy have destroyed the system that supported their wealthly income stream . . . the party IS OVER for almost everyone.
The best that can be done is to instill INTEGRITY in the corporations and markets with prudent regulations and oversights requiring full diclosures and adherence to sound business and accounting principles . . . This will push us to the "bottom" where we can start rebuilding our economy with faith and confidence in our business affairs and markets. We cannot avoid "doing this the right way" or we will merely experience a slow and painful protracted demise that will be even worse in the long run.
It is womewhat like the question of whether people want to be unemployed for three years or only a year and a halve? That's a brutal choice; but that is what many are being confronted with. Meanwhile the weekly layoffs of thousands of individuals will continue on throughout 2009 . . . there is no way around these hard economic facts; and, relatively speaking, there are no "new jobs" that are going to become available for individuals in a substantially declining economy . . . the DEPRESSION is HERE, no one wants to admit to that though.
How difficult should it be for Congress to expetitiously pass the needed regulations and implement the necessary oversight agencies to expedite recovery? (Congress and the CEOs are living in fear of the public finding out what the try situation really is . . . )
Hopefully Obama will do what is necessary to instill INTEGRITY in our business enterprises and markets. Will Obama turn out to be a modern day "Lincoln" or a "Calvin Coolidge"? Can he rise to the challenges that confront our nation? I hope so.