Ready for Takeoff? Recovering airline stocks have hit a pocket of turbulence again. In other words, it looks like a buying opportunity
(MONEY Magazine) – Airline stocks are not great buy-and-hold investments. Just ask Warren Buffett: He wrote off his only foray into airlines as a moment of "temporary insanity." But just because you don't want to hang on to most airline stocks forever, that doesn't mean you should never touch them. The key is to buy when times are tough and sell when things are better.
And right now things don't look so good. Sure, airlines rebounded in 2003 after two brutal years and billions in losses. They had nowhere to go but up. But after the huge rally from March to October--the Amex airline index rose 180%--the sector has pulled back by 15%. Investors worry about weak holiday sales and the slow winter travel season ahead. They've also been spooked by an earnings warning from the sector's darling, the discounter JetBlue (JBLU). And the risk of a terror attack, especially after December's orange alert, is still serious.
Barring that worst-case scenario, though, this is probably a temporary dip. Airline stocks tend to follow a boom-bust cycle that tracks the economy. "Once the industry starts to recover, it usually lasts for a few years," says Dan Kasper, managing director of economic consultancy LECG. Most analysts think the sector is on the way to its first profitable year since 2000--but in 2005, not 2004. So it's early enough in the airline recovery for investors to make a play.
Which stocks will catch the tailwind? There's no question that discount carriers have the better business model. They have been stealing market share from the debt-laden, high-cost major carriers, and now account for 25% of traffic, up from 10% as recently as 1999. Both JetBlue and Southwest Airlines (LUV) are profitable, cash-rich and relatively low on debt. And they can grow: Southwest is expanding in Philadelphia, while four-year-old JetBlue is still in the early stages of building a national network. Naturally, neither stock is terribly cheap. Southwest trades at 28 times its estimated 2004 earnings, and JetBlue's P/E is 25. (The S&P 500 is at 18.)
So if you have some stomach for risk, consider lower-quality airlines as a trading opportunity. In the short term--say, the next year--they have the most to gain if the economy picks up and lucrative business travelers return to the skies. Northwest Airlines (NWAC) has $2 billion in cash and lower costs relative to other majors. It also has a virtual monopoly on hubs in Detroit, Minneapolis and Memphis, and a strong Asia-Pacific network, notes Glenn Primack, co-manager of FMI Focus fund, which owns Northwest shares. America West (AWA), on the brink of bankruptcy two years ago, has been transforming itself into a discounter, simplifying fares to appeal to both leisure and business fliers. It trades at $11, or 13 times 2004 earnings. Standard & Poor's airline stock analyst Jim Corridore thinks it can hit $25 this year. --DONNA ROSATO