Investing in airline stocks? Read this first...

Graham Summers - Wed 09 Aug, 2006

...Consider that, collectively, US airlines have lost more than $40 billion since 2001. There have been more than 100 bankruptcies in the sector since the late '70s. You could easily have made a killing in the sector simply by short selling every airline company on the market...Insiders are dropping their companys stock like theres no tomorrow...

 
 
Just the other day, the Wall Street Journal published
an article about a recent increase in airline
industry profits.

The article begins by stating how both American
Airlines (NYSE: AMR) and Southwest Airlines
(NYSE: LUV) increased their profits in 2Q06. It then
goes on to state that according to Thomson Financial,
Continental Airlines (NYSE: CAL), US Airways
(NYSE: LCC), AirTran Holdings (NYSE: AAI), and
Alaska Air Group (NYSE: ALK) will post profits in 2Q06
and for the year-end 2006.

Also joining in on the profitability for 2Q06, though
not for the full year, are JetBlue Airways
(Nasdaq: JBLU) and UAL’s United (Nasdaq: UAUA).

At first, this may not seem like a big deal: companies
go profitable all the time. However, for an industry
that has lost as much as money as the airline industry,
this newfound profitability is nothing short of astounding.

Just how great are airlines at losing money?

Consider that, collectively, US airlines have lost more
than $40 billion since 2001. There have been more
than 100 bankruptcies in the sector since the late '70s.
You could easily have made a killing in the sector simply
by short selling every airline company on the market.

Yet now they’re starting to make money, in spite of
high fuel prices.

With oil hovering above $70 a barrel, airlines’ already
poor middle lines are getting hit hard. For instance,
American Airlines’ fuel prices are now 31% of its
operating costs, up from 12% just four years ago. Still,
that company just boosted its 2Q06 profits.

So it’s a tribute to the cost-cutting measures, increased
fares (average 1Q06 one-way airfare is up 13% from
the year before), and increased load factor (77% of
plane seats are currently full) that airlines are finally
turning a corner.

If this turnaround is really going to last, the insiders
at these companies must really be loading up on
stock, right?

Wrong.

Both Delta and AirTran have had decent bursts of
purchases, but they all were made over a year ago.  
And none of these purchases were particularly
sizable: most were in the tens of thousands of dollars.

In contrast, US Air and Continental both have had a
few recent insider purchases, though the large ones
were all part of prearranged purchase agreements
with investment firms, not purchases made by insiders
with their own money. In fact, the only US Air
purchase made by an insider with his own money
was Director Richard Schifter’s purchase of $23,000
in May – not much for a company with a $4 billion
market cap.

Yet the ugliest of the bunch are by far JetBlue and
Northwest. No insider has bought either of these
companies in more than two years.

Rather, the vast majority of insider activity at all
of these companies has been sales, numbering in
the hundreds of thousands, even millions of dollars.

Insiders are dropping their company’s stock like
there’s no tomorrow.

So it’s surprising that analysts have been toting these
companies as market darlings. US Air has had five
analyst upgrades in the last six months. On top of this,
both Credit Suisse and UBS have initiated coverage,
rating the company as "outperform" and "buy," respectively.

Similarly, of the last three analyst statements for
Continental, only one was a downgrade. Credit Suisse
and Prudential have JetBlue ranked "outperform" and
"overweight," respectively. And, almost everyone
loves Southwest.

Considering that insiders have to hold the shares
they purchase for at least six months, I’m very
suspicious about whether this industry’s newfound
profitability is going to last.

And between the analysts and the insiders, I’m going
with the latter.


Warm regards,

Graham Summers
for The Daily Reckoning