Monday, May 09, 2005


One can hardly classify AMR or CAL as weak airlines. These companies have cut their costs and expanded rapidly while enjoying very high load factors; all the makings for a profitable future. Yes, the companies still owe a lot of debt and report operating losses. Investors should keep in mind that operating losses include fast depreciation of assets. In other words, these companies are generating cash.

Of course, LUV and other regional and discount airlines are doing OK. The old legacy carriers are the ones still hurting. UAL, USAir, DAL and NWAC are all battling high fuel costs, high labor cost, high pension costs and low fares. Pension costs can be very high one year and drop sharply the next. Pension funding may be satisfied by a strong year in the stock market. Still, costs need to be cut further.

UAL and USAir are cutting cost by using the bankruptcy laws. DAL could be the next to enter bankruptcy. This leaves NWAC as the strongest remaining legacy carrier. The company has 2.3 Billion cash on hand is is not at risk of bankruptcy this year. The company is somewhat protected from the discounters because it flies many connecting flights in the north west and because it offers many international flights. Finally it is somewhat protected by its code sharing agreements which include agreements with CAL and DAL.

USAir is trying to cobble together a "national" line by making deals with regional carriers. NWAC needs to do more to reduce labor costs and labor sees survival without further cuts. With high labor costs and fuel costs, it may seem wise to avoid NWAC but I believe an airline industry turn is coming soon. The recent heavy demand across the board leads me to believe that fares are going to rise. Having operated a resort condominium rental business, I am very aware of the importance of filling vacancies. A vacant seat generates no income. With load factors coming on strong, there will be few vacant seats and all passengers will pay more. It is this operating leverage that produces the large swings in airline profits. A Big Boom is ahead for the surviving airlines.

If you do not own airline stocks, you might consider buying AMR and CAL. If you own those, NWAC is a risky selection for those who like to swing for home runs.