Monday, April 18, 2005

Earnings Outlook: Airline losses mount as fuel costs climb - Airlines - Transportation - Earnings

Not much has changed about prospects for airline earnings in the near term. The cost cutting moves are not complete and some of the labor agreements have yet to take effect. NWAC has increased its total projected savings to 1.1 Billion but analyst are skeptical that the goal can be hit. Fuel cost for the first quarter were out the roof. LUV hedged its fuels but the legacy carriers were stuck with the high costs.

The above linked article mentions that Merrill upgraded AMR, because it has successfully defended its turf at Chicago and Dallas/Ft. Worth. I think AMR will do well in the years ahead but my favorite is Continental. CAL has achieved substantial costs reductions and has re-mixed flights to more profitable routes.

It is hard to buy shares in a company that is losing record amounts. However, I have an advantage. My Great-Grandfather taught my Father that "The best time to get into the chicken business is when everyone else is getting out". My great-grandfather explained to my Dad 74 years ago that the price of chicken feed goes down when everyone else stops buying and the price of chickens goes up when everyone else stops selling. I am not sure if my Great-Grandfather knew what an operating margin was but he did well. He retired at the age of 55 and enjoyed the next 46 years as the elder statesman of the community.

I will be 55 on July 17 and I hope to have sold my resort rental property business by the end of the year. My Grandfather and Father also retired at 55 or 56 years of age. I don't believe that either of them ever owned an airline stock, but they both knew that "you make your money when you buy". Buying airline stocks is hard. It makes since to split positions, putting only high risk capital into DAL. An investment split between AMR,CAL and NWAC will likely get you two home runs or a 670 batting average. Through in DAL and you may get a grand slam but your risk of striking out would be higher. One could go for a bigger split by keeping some funds available until USAir and or UAL to exit bankruptcy.

To review, airlines have cut their costs to record lows per seat mile. Demand to fly is picking up. The business economy is strong and businesses normally pay higher rates. The airlines have high break even points but after they reach break even marginal revenue becomes mostly marginal profits. After four very tough years, the airlines are about to have four or more very good years.