Are Airlines Still in a Downward Spiral?

October 26, 2009

Airline stocks used to be the butt of Wall Street jokes. They were constantly bleeding money, and they certainly couldn't get you to your destination on time–let alone with the correct luggage.

But over the last year, the overwhelming losses, outrageous bonuses and eventual collapse of so many banks has put the financial sector in the doghouse. Instead of a passenger's bill of rights and surcharges for everything from snacks to extra bags, investors are now talking about toxic assets and government bailouts.

JPM, C, GS Beat Estimates–But Are They Good Buys?

To say that I fly a lot is an understatement. I'm constantly traveling between my Reno and Florida homes, I do about two free seminars per month in all corners of the country, and there are literally dozens of institutional investors or Wall Street experts that I meet with regularly around the world. So planes and airports are always on my mind!

In the past week, a number of airline companies reported earnings. That gives me a perfect opportunity to give you my opinion of these companies. And I'm talking, of course, of whether you should invest in these picks–not whether you're going to have enough legroom over the holidays.

UAL Corp. (UAUA)

UAL Corp. (UAUA) is the operator of United Airlines. On October 20, the company reported a smaller-than-expected quarterly loss and said it's seeing early signs of a recovery in business travel. However, a loss is still a loss. What's more, business travelers don't pay top dollar like jet-setting consumers so even though United's Q3 traffic fell only about 3%, revenue dropped by over 20%. In a rather frank statement, the company's president said, "There's no opportunity here for a full revenue recovery until we get premium cabin pricing back." That means until consumers start flying more, revenue will stay low for UAL Corp. even if traffic stays reasonably firm. As a result, I do not recommend holding UAUA stock and rate this airline stock a sell.

(Get my free in-depth stock report on UAL Corp. (UAUA), including fundamental analysis and historical trends.)

Delta Air Lines (DAL)

Delta Air Lines (DAL) reported a quarterly loss in its earnings report on October 22 that was even bigger than last year's. Volume and revenue from corporate customers remain down by double-digit percentages, and as a result, DAL plans to cut system capacity over the next year and lay off more workers–including slashing 15% of international routes. Not a good sign considering that Delta has already reduced capacity and shed jobs to keep operational costs down and preserve cash. Even if the American consumer starts taking to the air more often and paying more for tickets, Delta is shrinking and losing market share. I rate DAL shares a sell also.

(Get my free in-depth stock report on Delta (DAL), including fundamental analysis and historical trends.)

JetBlue (JBLU)

Unlike the previous airlines, JetBlue (JBLU) said in its Q3 earnings report that it posted a profit. Specifically, JetBlue earned $15 million or 5 cents per share in the third quarter, compared with a loss of $8 million or 3 cents per share a year ago. However, it looks like JetBlue is sacrificing comfort and customer satisfaction at the cost of its bottom line, and that's not a very good sign. The company said it won't rule out charging passengers for checking their first bag, among other fee-based initiatives. The company's success has been built on the fact that it is a low-cost airline with the cheapest flights in town. It already was taking heat for its policy of charging for the second checked bag–causing passengers to cram everything into one suitcase for the trip. To charge for any checked luggage really damages this company's low-cost image. As a result, I'm not predicting a lot of success for this company going forward. JetBlue is also a sell.

(Get my free in-depth stock report on JetBlue (JBLU), including fundamental analysis and historical trends.)

US Airways (LCC)

US Airways (LCC) joined the other big carriers and reported a third-quarter loss as it cut fares and had fewer planes in the air. Specifically, the carrier lost $80 million as revenue fell 17% compared with last year. The loss was smaller than analysts expected and the company said it is seeing signs that business demand is picking up, but again: No consumer travel means very low sales. What's more, business travel may be up but certainly isn't healthy again–corporate contracts at US Air dropped 17% in Q3 compared to 2008 numbers. Granted, that's not as steep as the 31% drop in corporate travel in the first quarter, but it's certainly not inspiring. As a result, I do not have a lot of confidence in LCC shares over the next few months and rate this stock a sell like all the rest.

(Get my free in-depth stock report on US Airways (LCC), including fundamental analysis and historical trends.)

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