Thursday, March 23, 2006


Even after 700% and 1100% runs in CAL and AMR, it still makes sense to average up! Our profits in these stocks were anticipated but the numbers still blow us away. The shares we added just 5 months ago have zoomed from $11.35 to about $28. Gains of about 150% in five months not counting the fact that many of our accounts trade on margin! Some accounts are up 500% in 5 months! Life is good! God is good!

A few readers have asked if we are still buyers and the answer is YES!

Take a look at the CAL web site (from the link above) and you will see that the month to date consolidated load though March 22 is 80.5%. This number includes the "back haul flights"! The last time planes were flying with so many seats full was in 1946! New capacity is insufficient to meet new demand at current prices!

After adjusting for any possible splits, it is plausible to believe CAL and AMR are on the way to $170 per share in less than three years. One of the reasons the gains can be so large is because the "perception to reality" spread is "inverted" but it is gradually starting to roll over.

I have recently corresponded regularly with the travel columnist in a major newspaper. He, like many others, is convinced that the airline business is a "bad business". This bias leads him to ignore or to even mis-state the facts. He makes statements such as, "Even the management at CAL does not expect to make a profit in 2006". My reading is that management does not expect to make a profit the first quarter, but then the first quarter is always a weak quarter. CAL is followed by 8 analyst who have an average 2006 earnings projection of $1.84. Earnings announcements to be made around mid April will cause these analyst to increase their forecast.

Having written many times before about the exponential increases in revenues that are resulting from the multiplication of higher fares times more seats sold, I will not go into the details here. However, the following list is all one needs to know about the current environment for investing in CAL or AMR:

1. Annual operating costs have been cut by a billion dollars or more at each of these airlines in the past few years.

2. The "New Global Economy" has dramatically increased the demand for international travel.

3. Carriers have made 20 or more price adjustments in the past year and fares will continue to climb as new planes are not being built as fast as the demand growth.

Here are a few of the supplemental details you might feel the "need to know".

1. "Low cost carriers" such as Southwest Airlines, do not own the rights to fly to international locations in competition with CAL or AMR.

2. Legacy carriers have very high fixed costs but after revenues exceeds costs almost all of incremental revenues flow to the bottom line.

3. In addition to the very high operating leverage, these airlines have very high financial leverage. Which means there is dramatic room for additional cost reductions as debt is paid down.

4. Cash flows are growing rapidly which will allow refinancing or payoff of the higher cost dept.

5. Many low fare coach seats are being replaced with high fare business and first class seats. The demand from the business traveler is for the wider seats and the decrease in supply of coach seats is driving those fares higher.

6. Transatlantic growth of 22% is pulling planes away from domestic routes. Total industry capacity is flat to down while total demand is up.

7. The older fuel hog planes are being retired or converted to freight planes (have you seen the FedEx traffic growth?). Further reducing seats available.

8. CAL and AMR have seen increasing freight business. New computer tracking of packages has helped. CAL has renewed and added significant international mail hauling business.

9. Bankrupted carriers such as DAL and NWAC are scaling back capacity.

10. Buy these bucking broncos and you will likely make serious money over the next three years.