Thursday, September 29, 2005

Airline Stocks: Airline weaken as energy prices rise - Airlines - Transportation - Markets/Exchanges - Market News

US Airways coverage was intiated at neutral by Calyon Securites. This was in spite of the companies estimate that the stock is selling at 4 times 2007 earnings. If these guys are correct about the earnings, then the stock should double within a couple of years.

The symbol, LCC, is an acronym for Low Cost Carrier; great call! The AWA management did a good job of operating AWA as a low cost carrier. Naming the stock LCC is a good indication of their focus.

Pundits are constantly on TV saying that the airline business is a lousey business. They do not understand. Any business that is built behind "monopoly" walls before being exposed to the "free" market is going to struggle for a while.

One reason the pundits claim the business is bad is because entry is easy. The facts do not support this contention. The overwhelming majority of the new carriers have been pummeled out of business. Most of the new entrants came in during a time when existing carriers had extremely high employee costs. While LCC does not have these costs, it does own landing slots, code sharing agreements and other means to compete fearcely with all comers.

Matt Percy in his blog Changing Airline Business Models agrees that smart strategic planning can provide some templates for sustainable future growth in the industry.

The price of fuel is a lead weight on each carrier and thus not a long-term problem. If the price of fuel stays high, the price will be built into the ticket price; if the price of fuel comes down, the carriers will receive a windfall profit. Despite the whining of the Senator from North Dakota, there is not a chance the Republican congress will make the silly mistake of passing another windfall profit tax.

My forcast for oil is $54 by June 1 of 2006. Solid profits will be made by LCC at $54 oil.



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