3 airlines that won't survive swine flu
Posted
Jul 27 2009, 01:52 PM
by
James Dlugosch
Rating:
The single biggest risk threatening your portfolio has nothing to do with the economy, credit crisis, global recession, massive unemployment, easy monetary policy, green shoots or corporate earnings.
No, the single biggest risk to your portfolio is the swine flu. Health officials recently projected that up to 40 percent of Americans could contract swine flu this year and next.
One of the industries likely to be hardest hit by a swine flu pandemic is the airline industry. Airline stocks have been big losers so far in 2009, but green shoots are appearing in the form of firmer load factors and price increases that are sticking.
But don't be fooled. The perpetual bust cycle of the airline industry is likely to strike again as the flu season ramps up this fall. Given the spread of the virus through human contact, load factors will surely fall as individuals seek to defend themselves from contracting the flu.
Insulate your portfolio from a pandemic by selling these three airline stocks now.
Airline Stock to Sell #1 -- US Airways (LCC)
US Airways (LCC) has always been a bit of a dog with fleas. The company has had numerous brushes with bankruptcy, and the current crisis has pushed the air carrier to the brink once again.
Shares of LCC dropped below $2 per share this year on fears that it would not be able to withstand a long recession. Those fears were calmed a bit last week as the company posted a profit of $58 million. But those gains are illusory as they includ one-time gains from settled jet fuel contracts. Without those gains, the airline lost $95 million.
Shares of LCC rallied on the news as investors covered short contracts or were speculating that the worst may be behind the company. Like many companies during the recession, the "it's not as bad as it could be" angle seems to be buoying shares.
But what happens if swine flu explodes? As far as I know, there is no market taking swine flu contracts to hedge against the pandemic.
Use the gains as a chance to exit a position before things get crazy this fall. Check out my top stock tracking portfolio at WallStreetSurvivor.com.
Airline Stock to Sell #2 -- Delta (DAL)
On the surface, the acquisition of Northwest Airlines was strategically wise. The deal eliminated another large competitor and provided Delta (DAL) with more leverage in negotiations with unions.
Indeed, DAL has been one of the best performers this year with a loss of only 50% as compared with much larger losses across the airline industry. But factor in the threat of the swine flu, and the deal may not look so good and shares may be vulnerable. Northwest's global routes would suffer tremendously if a massive outbreak were to occur.
Irrespective of swine flu, Delta is feeling some pain. In the current quarter, Delta lost $257 million and withdrew its forecast of a profit for the year. Management stated that it did not expect a material recovery any time soon. Now, add swine flu to the mix and you have a very significant problem.
I would sell Delta now taking advantage of relative strength as compared to its rivals.
Airline Stock to Sell #3 -- JetBlue Airways (JBLU)
Discount airlines will be particularly vulnerable by a protracted pandemic that keeps consumers from flying commercially. Low ticket prices require higher volumes of traffic to support the business. Take away that volume, and the business suffers.
With a low-price strategy and point-to-point flight model, JetBlue (JBLU) made a big splash in the industry by providing flyers with cheap, high-quality travel options. But a blip in customer service and overly aggressive expansion hurt the airline in its push to rival fellow discounter Southwest (LUV).
The stock has been trading aggressively lower since peaking in early 2007. In the second quarter, JBLU made a profit of $20 million or seven cents per share. More importantly, in stark contrast to the rest of the industry, the company expects to post a profit in the last half of the year based on fare hikes and a stronger economy.
In my opinion, that seems to be a bit aggressive and does nothing to warn investors of what would transpire should the swine flu drastically cut passenger loads. In the short term, that aggressiveness is supported by current share price. But all bets are off if a pandemic hits.
Investors would be wise to sell LCC, DAL and JBLU. Here are two more airline stocks to avoid at all costs. And be sure to check out my top stock portfolio at WallStreetSurvivor.com.
Related Articles:
