The airline stocks bottom-fishing thread

Discussion in 'Stocks' started by Cutten, Jul 15, 2008.

  1. Cutten


    Things are pretty bleak for this sector, which is usually the precursor of a secular low. With oil almost $150, the economy going down the shitter, and credit harder to access than a nun's knickers, we're pretty close to a perfect storm for the industry. Many of the conditions for a major, multi-year low are present. For example:

    1) Atrocious economic conditions for the sector
    2) Sector stocks trading at distress valuations
    3) Many businesses going bankrupt
    4) Deep value investors are into the sector (too early, as always)

    To make a low, I would want to see the following conditions met as well:

    5) Sentiment getting extremely bearish
    6) A major capitulation/panic day on large volume
    7) Some kind of shocking news headline affecting the sector e.g. one of the largest carriers going bust
    8) Major purchases by insiders

    So, this thread is for people to discuss the best way to play the forthcoming bottom in airline stocks. I'd recommend we focus on the following issues:

    i) what stocks would be best to play the bottom, recovery, and eventual boom several years down the line
    ii) stocks that are going to $0 via bankruptcy - both to avoid, and to short either outright or as hedges for longs.
    iii) how to time the low
    iv) how to handle the subsequent multi-year rally e.g. how not to sell out too soon, how to handle corrections, how much to allocate
    v) the best trading vehicles for playing the sector, maximising reward whilst minimising risk

    I'm in the UK so more familiar with airlines here. One of my friends is in the industry and pretty knowledgeable. The three stocks I'd be most interested in are:

    1) Ryanair (RYAAY, Nasdaq) - the lowest cost carrier in the developed world, with the best management and financial condition. If every airline went bust this would be the last one left. Basically the Dell Computer of the airline industry - just like in 2000-2003 Dell used its low cost base to go into a price war and kill off competition, Ryanair can do the same and should easily survive. They will also have excellent takeover opportunities if they wish to go that route, or buying other carriers assets out of bankruptcy. The only disadvantage is that the stock has not sold off as much as the other airlines.

    2) Easyjet (EZJ.L) - another well-run budget airline, better service but not quite as efficient as Ryanair. They are basically the European/UK version of Southwest. One reason I like this stock is they are still well managed, with a decent brand and moderate costs, but the stock has been killed, down much more than Ryanair's.

    3) British Airways (BAY.L) - probably the best run major carrier in Europe. Potentially could get state assistance in the event of a major meltdown.

    Globally, I'd be interested in Southwest in America, Singapore Airlines in Asia, and some of the Chinese carriers. Anyone got any more local knowledge?
  2. I'm in Europe as well (Germany). My opinion is that the airlines are like any extremely competitive business that needs a competitive edge to have pricing power. That's why in my opinion the major carriers are doing the best in these hard times. Flag carriers; Lufthansa, BA , Air France, Emirates etc have the brand power that attracts business travelers and higher value customers permitting them to charge higher fees.

    As for the US market, I wouldn't touch it, I wouldn't be surprised if the entire industry is under bankruptcy protection in the very near future. I read somewhere that in the history of the US airline industry their net profits are negative.
  3. I would add Qantas to your list.
  4. Yeh Qantas, Singapore Air, some other asian carriers due well also.. Probably should find the list of airlines Jim Rogers is buying, would be interesting.
  5. Bias disclosure: I work in the airline industry (Canada) for my regular job.

    Mergers throw too many variables into the mix in my opinion, with too many regulatory, government, labour, and economic variables involved to present a tradeable storyline. I don't see the NW/Delta merger as tradeable for that reason.

    Short carriers that have no credible merger storyline, and are likely candidates for bankruptcy.

    It is mighty crowded with american carriers in the Star Alliance now with United, US Airways, and (just last month) Continental. Conspiracy theory suggests that Continental was wooed as a hedge against one (or both) of the incumbents going bust. Therefore,

    1. United
    2. US Airways
    3. American

    Longs? Air Canada below $3? :D It is for sale, has a new fleet and good reputation. Exited bankruptcy in 2004. Canada is still relatively strong domestically due to the resource story. If you must, must go long airlines that is...
  6. He who picks bottoms.........

    ..............gets a smelly finger
  7. A good article that touches the subject:

    Airlines and the canine features of unprofitable industries

    Financial Times 27 September 2005

    The efficient industry hypothesis suggests that if an industry looks particularly attractive, or unattractive, then companies will enter, or leave, until the attractiveness or unattractiveness disappears. But then there are businesses which governments are keen on. The airline industry is one of them and governments fight to allow their taxpayers to pour ever more money into black holes.

    Warren Buffett observed that the world airline industry has not made a dime for investors in a century of manned flight. He said this in 1991, acknowledging his mistake in buying stock in US Air (now known as US Airways). Although Mr Buffett engineered a profitable exit from his investment, matters are no better. US Air is under Chapter 11 protection, along with United Airlines and now Delta and Northwest Airlines. The bankruptcy court judge is as essential to your flight as the pilot.

    The Sage of Omaha argues that industry factors generally dominate profitability: “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” But what gives an industry a reputation for bad economics?

    I have always favoured the efficient industry hypothesis, the business analogue of the efficient market hypothesis. If an industry looks particularly attractive, or unattractive, companies will enter, or leave, until that attractiveness or unattractiveness disappears. But, like the efficient market hypothesis, the efficient industry hypothesis is a tendency, not a universal truth. There is debate over whether company or industry effects are more important to persistent profitability but little doubt that some industries are persistent dogs.

    Some businesses attract too many entrants because people like being part of them. Newspapers, for one. Publishing and bookselling have always attracted people who love books more than they love money. With antique shops, wine retailing and restaurants you can always sit on a Louis XV chair and eat your own cooking with choice vintages, even if customers won’t. And frequently this is what happens.

    Some businesses have too much capacity because governments favour them. Politicians are convinced that steel is the product on which all economic activity ultimately depends and that the expansion of steel production is a measure of industrial success. When the Soviet Union collapsed, its gross national product was perhaps a tenth that of the US but its steelmaking capacity was greater. If steel is the totemic raw material, cars are the totemic manufactured product. Governments support more car plants than the market can justify. Good news for drivers but bad news for efficient car manufacturers and their shareholders.

    The dollar bill auction is an unpleasant party game played by economists. The rule is that a dollar bill goes to the highest bidder, but both highest and second-highest bidder must pay. The game can continue until the resources of the players are exhausted. Even if you are already hopelessly in the red – you have spent more than a dollar to gain a dollar – you may go on raising the stakes. Another cent might win you a dollar: not to put up another cent involves certain loss.

    The game describes wars of attrition in military strategy – and in commercial life. If the market will ultimately be profitable for those businesses that remain, companies go on spending in order to be among them. The total amount that can be lost in this process may, as in the dollar bill auction, greatly exceed the profits anyone will ever derive.

    The misfortune of the airline business is that it combines all these characteristics. Being an airline executive seems to offer the company of glamorous hostesses and the allure of exotic locations, even if the reality is meetings with insolvency practitioners and visits to the commercial courts. Governments want to see an airline carry their flag: Italy and Greece fight the European Commission to allow their taxpayers to pour ever more money into black holes called Alitalia and Olympic Airlines. Few other industries could have expected the speed and scale of assistance that Congress offered America’s airlines after September 11.

    Perhaps there is, ultimately, a profitable airline business for those who stay the course. That is what Northwest and Delta are telling their creditors, what Olympic is telling its sponsoring government. But as long as such claims are accepted, the day the airline industry earns a dime for investors less shrewd than Mr Buffett will never dawn.

  8. Mvic


    Jim Rogers is buying airlines but not US carriers
  9. Dont work for a hedge fund do you? Great analysis Cutten.
    #10     Jul 28, 2008