CHICKENS OR AIRLINES?

Great Grandpa said the time to buy into the chicken business was at the bankruptcy sale. Grandpa had it figured two ways. If others stopped raising chickens the price of chicken feed would go down and the price of chickens would go up.

The way George Burns had it figured was that he would stay in show business until he was the only one left. George and Grandpa wanted to make big money by being in business when others were out of business.

At the current time, 4 of the 10 largest airlines are in bankruptcy. The top ten have dramatically cut their costs. American Airlines expects to cut its costs by 4 billion dollars per year; a whole lot of chicken feed! Continental already won big union concessions and has asked for another 500 million in annual labor savings! Delta is cutting 7,000 jobs! Bankruptcy judges are set to rule on the abrogation of union contracts! US Air may be liquidated! Need I go on? Can the airline business get much worse?

Three years ago, the cell phone business was in bad shape. There were too many players. Lots of small companies such as LWIN filed for bankruptcy. Even big companies such as NXTL and AWE were in bad shape. NXTL had a negative net worth. Since then NXTL is up 1000%! Eighteen months ago, AT&T wireless was suffering but Cingular bought the company at double the price! Sprint suffered through the worst of times and is now buying NXTL!

Sometimes, I learn from my mistakes. In 1982 the US car business was in terrible shape. Ford and GM were losing money and Chrysler was on the ropes. I bought Chrysler for $2.45 per share. In less than two weeks I doubled my money and, like a dummy, I sold the stock. The stock went up for the next 18 years! I would have made about 100 times my money if I had held on to this hurting business.

The Airline business has been in trouble for a long time. Current prices make no sense. Let's suppose that you own 12 Billion Dollars. Your nest egg is equal to the value of all the shares of the 6th largest and most profitable airline, Southwest Airlines. Your nest egg is also equal to the value of all the shares of the largest airline, AMR plus another 10.4 Billion Dollars! And believe it or not, your nest egg is equal to the value of the 3rd, 4th and 5th largest airlines combined plus another 9.5 Billion Dollars! Together, 3-4-5 are twice as big as AMR but the stock value of all three is slightly more than the value of AMR!

Numbers 3, 4 and 5 are Delta, Northwest and Continental (DAL, NWAC, and CAL). These three airlines participate in code sharing. Any of these carriers can sell tickets on any of the other carriers plus on a number of international airlines. Together they are a competitive force. AMR is number one but it is only half as big as these three. Number 2 and 7, UAL and US Air, are both in bankruptcy. Even if they both make it out, DAL, NWAC and CAL will be the stronger national and international competitor.

DAL, NWAC and CAL grew the combined revenues this year by 8%. All three dramatically reduced their operating cost. All three will produce positive cash flow next year and I believe all three will produce operating profits in 2006. No doubt, the airline business is very cyclical, which is another way of saying that when the airlines make money they make a lot of money.

Note that I am not saying that Southwest Airlines (LUV) is about to go down in value. Rather that the 3rd , 4th and 5th airlines are selling at an average of a 93% discount to the number 6 airline. If I had 12 Billion Dollars I would not even consider putting it all into LUV. On the other hand, I would enjoy buying all of DAL, CAL and NWAC if I still had 9.5 Billion Dollars left over! A few weeks ago, in monitored accounts, I purchased several hundred shares of CAL. Tomorrow, I will add additional airline shares. Caution! Put no more than 5% of your holdings in these stocks and be willing to sweat it out if the oil price surges again. Long-term holders should see substantial rewards.

By the way, most analysts do not recommend these stocks, which means that when the business improves, they will tell a lot of people who don't own these to buy. Although I am a successful amateur investor and have 42 years experience, don't buy on my recommendation. Do your own research, think for yourself and buy through a discount broker to save 90% or more on the trade cost! Make the purchase in a monitored account and I will keep an eye on your holdings.