United States Airline Stocks can be hazardous to your wealth
When equity analysts qualify their recommendations with warnings like "investing in airline stocks is very risky" and "trading airline stocks can be hazardous to your wealth," you kind of get the picture.
The warnings, which appeared in recent notes from Lehman Brothers and UBS, respectively, are well placed.
Shares of most major U.S. airlines have plummeted during the past year amid record oil prices and a weakening economy, wiping out billions of dollars in stock market value.
Take United Airlines parent UAL Corp. Its stock has fallen from $51.60 last October to under $8 on Wednesday.
Then there is AMR Corp, parent of American Airlines. It has seen its share price fall from $29.32 last July to around $6.35 on Wednesday.
Some experts believe U.S. airline stocks have now become the domain only of professional traders and speculators who can profit from short-term price movements, or short sellers who make money if stocks decline.
"For long-term investors, these are not investments that they should be looking at," said Brian Nelson, analyst at Morningstar.
"Airline stocks are of a different breed -- the structural features are horrible in terms of the industry," Nelson added.
Sky-high fuel prices and a weakening U.S. economy have stalled the U.S. airline industry's modest recovery from the 2001-2006 downturn. Oil prices have roughly doubled in the past year.
To survive, U.S. airlines are slimming down. They have reduced services and capacity, cut jobs, hiked fares, and added new fees and surcharges. But unless oil prices ease soon, some experts believe these measures might not be enough.
A MATTER OF TIME
At least seven small airlines have filed for bankruptcy or stopped operating in recent months.
And if oil prices do not retreat soon, some analysts believe it is a matter of time before a major airline files for bankruptcy.
"The state of the airline industry is one of disrepair and the industry faces a crisis as oil prices soar," said Calyon Securities analyst Ray Neidl.
Meanwhile, most airline shares keep falling.
The stock of Delta Air Lines, which has announced plans to acquire Northwest Airlines, has declined from $21.80 last July to less than $6 today. Over the same period, Northwest shares have fallen from $24.23 to around $6.50.
Continental Airlines has dropped from $38.61 to around $12.50 in the last 11 months and US Airways Group has plummeted from $36.19 to around $3.50 over the same period.
Most U.S. airline stocks have fallen so much that Germany's Lufthansa now has a stock market value worth more than AMR, UAL, Delta, Northwest, Continental and US Airways combined.
Indeed, South west Airlines , which has a history of successfully hedging against high fuel costs reflected in a stronger stock price also has a stock market value higher than its six rivals put together. Southwest shares have declined much less than its rivals, from $16.96 last August to under $14 on Wednesday.
"Airline equities could go to zero ... you are betting that crude oil could fall," said Morningstar's Nelson.
"Crude oil could definitely fall at some point -- however airline stocks could very well be bankrupt well before then," Nelson added.
JP Morgan analyst Jamie Baker has estimated a collective loss of $7.2 billion for U.S. airlines this year.
WORTH A GAMBLE
And yet there are some who believe that selected airline stocks are worth a gamble.
In a note to clients last week, Lehman Brothers' Gary Chase, the analyst who said "investing in airline stocks is very risky," also said his firm sees "substantial upside potential in selected airline equities as the industry undertakes an historic restructuring."
Chase wrote: "Risks are extreme, but we believe justified by substantial upside potential," adding that his favorites are Delta and Northwest as they have the "best balance sheets, liquidity, and cash burn profiles."
Neidl of Calyon Securities said U.S. airline stocks have become merely "trading vehicles" for professionals who know what they are doing.
"We continue to believe that the major carriers will make it through what will be a difficult 2008 and that as trading vehicles the stocks will be attractive acquisitions at current low prices -- but the time is too early," said Neidl.
Morningstar's Nelson agreed, saying U.S. airline stocks have not yet reflected the rising risk of bankruptcy.
Even at their current low levels, Nelson added: "I still think most of them are overvalued."
The warnings, which appeared in recent notes from Lehman Brothers and UBS, respectively, are well placed.
Shares of most major U.S. airlines have plummeted during the past year amid record oil prices and a weakening economy, wiping out billions of dollars in stock market value.
Take United Airlines parent UAL Corp. Its stock has fallen from $51.60 last October to under $8 on Wednesday.
Then there is AMR Corp, parent of American Airlines. It has seen its share price fall from $29.32 last July to around $6.35 on Wednesday.
Some experts believe U.S. airline stocks have now become the domain only of professional traders and speculators who can profit from short-term price movements, or short sellers who make money if stocks decline.
"For long-term investors, these are not investments that they should be looking at," said Brian Nelson, analyst at Morningstar.
"Airline stocks are of a different breed -- the structural features are horrible in terms of the industry," Nelson added.
Sky-high fuel prices and a weakening U.S. economy have stalled the U.S. airline industry's modest recovery from the 2001-2006 downturn. Oil prices have roughly doubled in the past year.
To survive, U.S. airlines are slimming down. They have reduced services and capacity, cut jobs, hiked fares, and added new fees and surcharges. But unless oil prices ease soon, some experts believe these measures might not be enough.
A MATTER OF TIME
At least seven small airlines have filed for bankruptcy or stopped operating in recent months.
And if oil prices do not retreat soon, some analysts believe it is a matter of time before a major airline files for bankruptcy.
"The state of the airline industry is one of disrepair and the industry faces a crisis as oil prices soar," said Calyon Securities analyst Ray Neidl.
Meanwhile, most airline shares keep falling.
The stock of Delta Air Lines, which has announced plans to acquire Northwest Airlines, has declined from $21.80 last July to less than $6 today. Over the same period, Northwest shares have fallen from $24.23 to around $6.50.
Continental Airlines has dropped from $38.61 to around $12.50 in the last 11 months and US Airways Group has plummeted from $36.19 to around $3.50 over the same period.
Most U.S. airline stocks have fallen so much that Germany's Lufthansa now has a stock market value worth more than AMR, UAL, Delta, Northwest, Continental and US Airways combined.
Indeed, South west Airlines , which has a history of successfully hedging against high fuel costs reflected in a stronger stock price also has a stock market value higher than its six rivals put together. Southwest shares have declined much less than its rivals, from $16.96 last August to under $14 on Wednesday.
"Airline equities could go to zero ... you are betting that crude oil could fall," said Morningstar's Nelson.
"Crude oil could definitely fall at some point -- however airline stocks could very well be bankrupt well before then," Nelson added.
JP Morgan analyst Jamie Baker has estimated a collective loss of $7.2 billion for U.S. airlines this year.
WORTH A GAMBLE
And yet there are some who believe that selected airline stocks are worth a gamble.
In a note to clients last week, Lehman Brothers' Gary Chase, the analyst who said "investing in airline stocks is very risky," also said his firm sees "substantial upside potential in selected airline equities as the industry undertakes an historic restructuring."
Chase wrote: "Risks are extreme, but we believe justified by substantial upside potential," adding that his favorites are Delta and Northwest as they have the "best balance sheets, liquidity, and cash burn profiles."
Neidl of Calyon Securities said U.S. airline stocks have become merely "trading vehicles" for professionals who know what they are doing.
"We continue to believe that the major carriers will make it through what will be a difficult 2008 and that as trading vehicles the stocks will be attractive acquisitions at current low prices -- but the time is too early," said Neidl.
Morningstar's Nelson agreed, saying U.S. airline stocks have not yet reflected the rising risk of bankruptcy.
Even at their current low levels, Nelson added: "I still think most of them are overvalued."
Labels: American Airlines, AMR Corp, arline stocks, Continental Airlines, crude oil, hazardous, hike in fuel prices, Morningstar's Nelson, trading, United States, US Airways, wealth
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