Tuesday, March 01, 2005


Continental Air (CAL) has negotiated agreements with a couple of its unions. Management anticipates savings of $500 Million per year. The company has 67 million shares outstanding. A savings of $7.46 per share?!

Because the industry is in a distressed state, I have hedged my bets. I have spread my investments into four legacy carriers; CAL, DAL, NWAC and AMR. The airline business is one of very high operating leverage. It is a business that requires very high financial leverage. These factors make earnings very volatile. In my humble opinion, the next swing is going to be very strong. The past two quarters the company has lost an average of 16.5 million dollars. The savings announced average 125 million dollars per quarter.

CAL has the power to earn $6.50 per share or more by next year. I don't think the stock will be selling for $11 per share if it makes $6.50 per share. The company has negotiated an extension on its purchase of Boeing planes. CAL will not lose out on the purchase deal if the union passes the contracts.

I did not take the time to look up the dates of the votes because I wanted to let you know quickly that a deal has been struck. My guess is the stock will move up another couple of points in anticipation of a positive vote.

Written for education and entertainment purposes. Distressed stocks are risky, to buy or not to buy is the question you alone can answer.