Monday, November 07, 2005

Marketwatch - Interactive Charting

Marketwatch - Interactive Charting

A one year chart of CAL and AMR shows that CAL is up 35% and AMR is up 60%. Perhaps the more important chart is the one from the 1994 to 1997 time frame. This was a similar time. The economy had a recession in 1990-91 and in 2001. The economy recovered over the next 4 years and then expanded in the second half of the decade. Within about 3 years, the airlines went up 300% or more.

Of course the past does not guarantee the future but history does tend to repeat. The history of business cycles is that airlines sell high dollar seats and make serious money to business travelers during economic expansions. Having followed CAL fairly closely, I can tell you that CAL has recently been expanding first class and business class seating at the expense of low margin "consumer" seats.

CAL is expanding long-haul, high margin, international flights. The fact that a new ariline is flying one plane to an airport 45 minutes out from London makes the news but CALis expanding routes that will make the money.

Back in July, before the NWAC and DAL bankruptcies, CAL and AMR were each up 80% on the year. The pull back is giving investors a great opportunity. Prudential has a one year price target on AMR of $28. JP Morgan has upgraded CAL to buy.

I certainly can't promise you that AMR will zoom from $12 to $28 in a year, not even in a couple of years. However, I am confident that the price of fuel is going to come down. With Canadian tar sands as one example of ample fuel at $45 per barrel or less, this extra supply will pull the price down to $45 over time. In the mean time, other supplies will be discovered that cost much less than $45 to produce.

Furthermore, I am confident that, with lower labor costs in place, lower fuel costs will lead to substantial profits for AMR, CAL and LCC. I do not like the price of LUV. Southwest is a well run ariline but the market has more than rewarded its efficiency with a price that is way over the top.