Thursday, May 19, 2005

US Airways, America West tie the knot - Aerospace - Airlines - Manufacturing - Transportation - Company Announcements

US Airways, America West tie the knot - Aerospace - Airlines - Manufacturing - Transportation - Company Announcements

Airline deals are happening. UAL cut its pension costs by $3 Billion a year. DAL hopes to do a similar deal. USAir has already dropped its pension costs onto the PBGC and AWA is buying USAir!

America West is half the size of USAir but the merged company should be able to cut costs further while retaining the best routes of both carriers. Not that there is much redundancy in routes but economies of scale can be achieved in operations.

The classic industry turn-around is in the works. Costs are being cut while business is booming. It is fundamental in economics that if you lower the price more of the product will be sold. DAL made the move a few months back to lower prices in-line with the discounters. Another interesting angle is that while stock analyst cry the blues over the high costs of fuel, high gas prices have helped the airlines make the turn. When consumers fill their auto tanks the increased prices are confrontational whereas airline tickets are cheaper now than 5 years ago. By the way, this is another example of where the inflation whiners are missing the boat. They see inflation everywhere but ignore the fact that more airline tickets are being sold than ever before at significant discounts.

Most planes are flying full or close to full. AWA suggest that it can make a profit even if the price of oil goes back above $50 per barrel. Ticket prices have increased off the lows and more increases will come.

Buying turn-around stocks is not for the weak at heart. If you decide to play the game, spread your risk among several carriers or buy an EFT. As a general rule I avoid mutual funds because I do not like the heavy drag. The EFT drag is typically a small fraction of the drag on managed funds. Besides, no one really knows which of these airlines will do the best. Never-the-less with commissions at only $5 one can easily create ones own EFT and avoid the drag.

CAL has been a very well managed company since it went through bankruptcy about 15 years ago. The top man recently retired. My family owns a substantial stake but maybe the new management will not do as well. We can't be sure but we own shares in three other carriers so far. We believe the average gain in this sector will be over 100% in four years or less.