Tuesday, December 14, 2004


The best investments are often made in the "eye of a storm". This morning while US Air flight attendants are fighting the rulings of the bankruptcy judge and while Southwest Air is picking over the remains of the latest bankrupt airline, we purchased shares of DAL for $7.68.

The US economy is picking up. Business travel is picking up. DAL and other airlines have cut expenses dramatically. The airline business is one of very high operating margins. This means that they lose a lot when things are bad and make a lot when things are good. The key to making big money on this type of stock is to buy in anticipation of the up-turn. If you wait until the companies are making big profits, you will have to pay a big price for the stock.

Granted DAL is very much in debt. It could easily follow UAL, US Air and others into bankruptcy. We have spread our risks in this particular account by splitting our purchase between DAL and CAL. We have a quick 30% profit in CAL but are holding on in expectation of at least a double bagger in the next few years. Who knows? if DAL does not make it, maybe CAL will buy the assets cheap or vice versus.

Both companies made it through $55 per barrel oil. Oil is up $ .74 today to $41.75. My belief is that the average price of an airline ticket is going to go up by more than the oil increase over the next several years. The legacy carriers will be the beneficiaries. Interest rates will rise but these companies do not need to spend money on new planes. Filling up the seats on the planes now flying will be more than enough to make this business profitable.

I expect it to take two years for DAL to become profitable. Buy this one with speculative funds if you have the patience to wait two to five years for a handsome return.


Jack's Old Merrill Pal said...

Doctor I must seek a second opinion on this one. I have tried the airlines over and over in my short investing career and failed in each endeavor.

Anonymous said...

The first time I tried the airlines, I was burned badly when Eastern Air went busted. Later I wised up. I purchased US Air after it made it through the worste of the next down-turn. I can't remember exactly but I believe the stock built a base between 3 and 5 dollars per share. I bought on the break out. I tried to buy at about $6.50 but paid about $7. Warren Buffet was a big investor in USAir in those days. I got out a little too early but the stock went to $64 or so. USAir is in bankruptcy for the second time this cycle but CAL and DAL have built a base and are on the way up.