Airline stocks headed for summer rally Buy mainline carriers

Rebel · Post by **Rebel** » Mon Apr 09, 2007 6:18 am

Financial Post
Published: Monday, April 09, 2007
Never mind the snow, it is indeed spring, and the mild weather is a reminder for investors to buy airline stocks, says Calyon Securities analyst Ray Neidl.

At this time of year, "the industry heads into its two best quarters" marked by the heavy travel summer season, Mr. Neidl said in a note Thursday.

Airlines tend to make bad long-term investments. Remember, the joke that the way to make a million in the airline business is to buy an airline for a billion dollars, and watch the value plummet to a million. But after climbing out of the bleak post- 9-11 period, revenue and traffic are growing, leading to expected strong operating performance and profit gains, Mr. Neidl said.

He expects the U.S. industry to lose US$142-million in the first quarter -- "not bad by historical quarters" but to earn US$5.9-billion in 2007, and US$6.5-billion in 2008.

He offers a big caveat: Better fortunes depend on the economy, "which appears to be holding up for now." There are other concerns, such as a possible spike in oil prices. But even at US$60 a barrel, the industry should make solid profits, he says.

His advice: Focus on mainline carriers: Alaska Air Group (ALK/NYSE), US Airways (LCC/ NYSE), American Airlines parent AMR Corp. (AMR/NYSE), Continental Airlines Inc. (CAL/NYSE) and UAL Corp. (UAUA/NASDAQ), parent of United.

"Even though we expect all [airlines] to rally, we favour the legacy sector in the immediate future since they can better take advantage of the upside cycle with their vast systems, progress in making cost cuts and broad yield management systems," he wrote.

The situation in Canada looks good, too. Air Canada (ACb/TSX) and WestJet Airlines (WJA/ TSX) each reported their busiest March ever this week, leading analysts to upgrade their stock price forecasts.

ssilcoff@nationalpost.com

© National Post 2007

CanadaEH · Post by **CanadaEH** » Mon Apr 09, 2007 5:34 pm

Why would you bank on financially unstable carriers? Unless you're looking for short-term gains, those seasonal profit/losses are still there (at least in the US). LCC's have the margins to support short/long-term investments, IMO.

invertedattitude · Post by **invertedattitude** » Tue Apr 10, 2007 5:09 am

Is that assuming WJA is an LCC, because I think the industry considers it not to be anymore. Depending on your definition of what an LCC is of course.

CanadaEH · Post by **CanadaEH** » Tue Apr 10, 2007 6:18 am

The definition of a LCC hasn't changed.

For the 50th time: LCC = LOW COST CARRIER.

The idea of what a LCC is has changed, if that's what you're suggesting. The view of a LCC 10 or 20 years ago was bare bones, no-frills. The LCC of today relates more to the cost structure of an airline.

abc xyz · Post by **abc xyz** » Tue Apr 10, 2007 6:23 am

i think your completely nuts if you look at airline stocks as anything more than a trade. make your money then get out. whether its AC, WJ, LUV etc etc. the business is simply too cyclical and volatile for long term investment

tonysoprano · Post by **tonysoprano** » Tue Apr 10, 2007 11:46 am

The stockmarket has always been a gamble. I would personally invest in real estate. To say that WJ or any LCC is the better choice might hold some truth but personally, to me not all LCCs are the same. WJetters like to compare themselves to other successful LCCs like Southwest and while the similarities are there now, I don't think it will be the same in the near future. Southwest enjoys the fruits of the American market. RyanAir even more so with the benefits of the European market. The fact is that even though WJ is grabbing more and more of the Canadian domestic market, eventually that market will reach a plateau, expansion will stop and external events could have huge effects on the price of the stock. Try changing the model and the stock takes an even greater hit. Widebodies and being the next national carrier will be fatal to the price of the stock. This has nothing to do with the longevity of the company or the quality of the employment. Only my view from an investor point of view on the price of the stock. If you're in it to make a quick buck, go for it. If you're in it for your retirement, IMHO, don't do it.

WJ700 · Post by **WJ700** » Tue Apr 10, 2007 12:36 pm

invertedattitude wrote:Is that assuming WJA is an LCC, because I think the industry considers it not to be anymore. Depending on your definition of what an LCC is of course.

Any extra service or cost that WestJet has added has been a money maker. TV's create 3 bucks per leg, per headset. Buy on Board food makes cash, liquor is huge. New airplanes are no longer a choice. Every carrier must have them to make money. Leather seats last 10 times longer than cloth but cost only twice as much. 22% of WestJet's profit comes from sources that are not selling tickets or cargo.
Also, the bigger WestJet grows, the lower the CASM goes. The market still considers WJA an LCC but I'm honestly curious why you're thinking we are not?

Tony... totally agree about the bigger type and stock price. You'll see me sweating a bit if WestJet ever tries a run overseas, but they do have a large Transborder market to develop yet before they need to take that chance.

tonysoprano · Post by **tonysoprano** » Tue Apr 10, 2007 12:47 pm

WJ700.
Yep. Still lots of room for growth for WJ. And who knows, the overseas might work too. But I think it's a big risk on the stock price.

CanadaEH · Post by **CanadaEH** » Tue Apr 10, 2007 3:01 pm

I think WJ getting a larger aircraft is inevitable. Lots of growth in the Carribean and a little bit in the US but at some point WJ will have to grow big.

tonysoprano · Post by **tonysoprano** » Wed Apr 11, 2007 10:45 am

Speaking of stock prices, WJ is .20 cents away from matching AC's stock at this hour.

flyinphil · Post by **flyinphil** » Wed Apr 11, 2007 4:52 pm

Apples and oranges... stock price means nothing without knowing the market cap.

CanadaEH · Post by **CanadaEH** » Thu Apr 12, 2007 9:49 am

tonysoprano · Post by **tonysoprano** » Thu Apr 12, 2007 10:44 am

Yeah. Another know-it -all. I'm so impressed. Or is it bored?

CanadaEH · Post by **CanadaEH** » Thu Apr 12, 2007 9:26 pm

Well he's right... stock price is meaningless unless you know the market cap. I just thought the apples oranges thing was funny. What's wrong, a little sensitive tony?

tonysoprano · Post by **tonysoprano** » Fri Apr 13, 2007 5:34 am

No CanadaEh, it just seems that you can't make any comment around here without some expert jumping in. Although I must say I find the A's and O's thing flattering. Yes, of course he's right. Sorry Phil but all I was trying to point out was that WJ stock (that means your bread and butter CanadaEh) has jumped up to match AC's. That's a great accomplishment. In fact, I can see AC's stock going down a couple of bucks in the near future. It doesn't mean anything to me as I don't rely on that income. Just an observation from my point of view. Anyway, I guess that's what makes this forum so informative and fun, eh?