Investors Returning to Airline Stocks
It's been a dismal year for airlines, with crushing fuel prices and bruising competition that have spurred billions of dollars in losses and driven half the industry into bankruptcy.
So why are investors snapping up airline stocks?
In the past three months, shares of Fort Worth-based AMR Corp., parent of American Airlines, have rocketed more than 50 percent. On Tuesday, shares closed at $18.75, up 80 cents, or about 4 percent, for the day. It was the airline's highest stock price since mid-2002.
Shares of Continental Airlines, headquartered in Houston, have soared nearly 40 percent during the past three months. Discount carrier Southwest Airlines, based in Dallas, has seen its stock jump about 20 percent.
The Amex Airline Index of 10 leading airline stocks is up 12 percent since September.
"Let's be realistic: These stocks still aren't exactly strong," said airline analyst Ray Neidl of Calyon Securities in New York. "But compared to the last 12 months, they've really rallied."
The rise in AMR's stock is particularly noteworthy. The price is so sturdy compared with prices the past few years that company executives recently announced a new stock issue at $17.25 per share. It's the first equity offering since 1992, and company executives say they hope to raise $224 million.
Several forces have pulled investors back to airline stocks, according to analysts: strong traffic demand in 2005, declining fuel prices and optimism that the industry's domestic capacity will shrink next year.
Just as important, some analysts say, is the fact that the airlines are finally seeing results, however meager, from several years of cutting costs. Some analysts forecast small profits for airlines including AMR in 2006.
"We believe the industry has finally turned the cyclical corner," Jamie Baker, an airline analyst with JPMorgan in New York, said in a recent report to investors.
Surprisingly, fuel prices are one reason for the recent surge. For more than a year, the rising price of oil has been the industry's bogeyman. This year, fuel could cost the airlines $9 billion more than in 2004, according to the Air Transport Association.
Yet a recent drop in oil prices has some investors hoping that the fuel picture will improve next year, helping airlines return to profitability. On Tuesday, crude-oil prices were at about $60 per barrel, down from close to $70 earlier this year.
Even more significant was the price of jet fuel. Gulf Coast spot prices were about $154 per barrel last week. That's down from more than $300 after Hurricanes Katrina and Rita, which damaged the Gulf Coast refineries that process jet fuel.
Fuel-price reductions, in part, caused analyst Baker to upgrade his 2006 forecast for AMR and Continental last month.
"For a model that supposedly didn't work at $40 oil, we believe it can and will at $60," he wrote in a research report.
Strong traffic demand also has some investors bullish on the airlines. Heavy traffic during the summer spurred record passenger loads, and most travel experts predict the demand will continue next year.
That could mean higher fares, particularly if domestic airline schedules shrink. Most of the major carriers are reducing their U.S. capacity and shifting resources to more-lucrative overseas routes.
That's a welcome change after several years of domestic-flight increases, said Roger King, an analyst with CreditSights, an independent research firm based in New York.
"The airlines are exhibiting broad-brush domestic capacity discipline," he wrote in a report Monday.
Still, most analysts say that the airline industry remains volatile and that stocks could quickly plunge, particularly on news of another natural disaster or terrorist attack.
But Michael Linenberg, an airline analyst for Merrill Lynch, remained hopeful in a recent note to investors.
"We believe this momentum is likely to continue at least for the next six months," he wrote, "hence providing further lift to the stocks."
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