Airline Stocks Descending on Fear of Higher Oil Prices
After a three-month rally, airline stocks dipped this week on fears that higher oil prices could squelch a 2006 industry recovery.
And some analysts have predicted that airline stocks will cool off further.
"We believe that the market has overreacted to [recent] positive developments for some of the carriers, including American, Continental and US Airways," Ray Neidl, an airline analyst for Calyon Securities, wrote in a report this week. "They still face crushing fuel expenses and probably cannot make significant profits unless there is some relief in this area."
Shares of Fort Worth-based AMR Corp. (ticker: AMR), parent of American Airlines, have dropped $1.80 per share, or about 8 percent, this week. Dallas-based Southwest Airlines ( LUV) has fallen by 74 cents, or about 4 percent.
Other airlines saw even bigger stock dips. Shares of US Airways ( LCC), which merged with America West Airlines last year, are down $4.01 per share this week, a drop of more than 10 percent.
The price drops come after a strong performance in 2005, particularly during the fourth quarter. Since Oct. 1, shares of AMR, for example, have surged $9.68 in value, or more than 86 percent. The increase was driven by a decline in oil and jet-fuel refining prices as well as rising revenue from higher fares and increased traffic.
In November, American executives took advantage of the rally to announce a new stock offering, the first time the airline has issued new shares since 1992.
But several analysts this week warned investors that airline stocks may have peaked, at least in the short term. A major concern was the price of oil, which climbed back to about $64 this week after having retreated.
"It is hard to believe that companies that at best are expected to make only marginal profitability are selling at such high prices, particularly in light of the many risks and uncertainties the industry still faces," Neidl said. "Our opinion right now is, let the buyer beware."
Andrew Light, a London-based analyst for Citigroup, said that a 2006 recovery "is already priced into AMR's share price."
In an investment note, he advised that "after a very strong share-price performance, we believe investors should consider lightening [their] positions."
A decline in AMR's stock price could affect some employees as well as investors. About 1,000 management employees will receive performance bonuses this year tied to the airline's April 18 stock price. If shares drop further between now and then, those bonuses will be worth less. But that could be a blessing in disguise for American's executives, who have faced severe criticism in recent days from union leaders over the bonuses.
AIRLINE STOCKS DROP
Airline stocks, which shot up last year on lower oil prices and high demand, might be running out of gas.
Thursday's close % chg. this week
AMR Corp. $20.86 7.9%
Southwest $16.36 (- 4.5%)
US Airways $34.99 (10.3%)
Continental $20.17 (8.4%)
AirTran $15.44 (8.0%)
Sources: Star-Telegram, Bloomberg News
News stories provided by third parties are not edited by "Site Publication" staff. For suggestions and comments, please click the Contact link at the bottom of this page.