Fasten your safety belts: Investors in airline stocks have had a bumpy ride in 1991. These stocks were flying high following the end of hostilities in the Persian Gulf and a resulting decline in oil prices. But they later took a nosedive due to continued recession and dismal earnings results.
Expect the turbulence to continue. These are definitely not investments for the faint of heart. Within this volatile industry, only the strong survive these days.
American Airlines, United Airlines, Delta Air Lines and Southwest Airlines flex the most muscle in an extremely weak overall economic situation. USAir Group and Northwest Airlines are somewhere in the middle of this difficult scenario, while most other carriers are looked down upon as losers by analysts.
"Airline stocks will be bouncy because they're extremely sensitive to the economy, fuel costs and labor relations," said Edward Starkman, analyst with PaineWebber Inc. "While some may view their prices as cheap because of the selloff, the fundamentals really aren't very strong."
There's always a diversity of opinion about airline stocks, due to an unpredictable nature even in the best of times. They're currently operating with low passenger traffic with no immediate signs of improvement.
Starkman recommends shares of AMR Corp. (American), UAL Corp. (United), Southwest and Delta because they should be able to weather any hardships.
The strongest carriers are best-managed, and most aren't limited to just a certain segment of the United States or the world. That permits them to compensate for some weak regions with those that are more robust. Investors should stay away from investing in smaller carriers, he said.
"Looking toward the end of the year, I think it's safe to say the four biggest carriers will lose money, mainly as a result of industrywide rate cuts to encourage air travel," said Steve Sanborn, analyst with the Value Line Investment Survey. "Turning to 1992, assuming an improved economy, we should see the airlines return to profitability in the second quarter."
At that point, the industry will be considerably more consolidated and won't have to compete with severe price discounts by bankrupt carriers, he believes.
For now, Sanborn is holding off recommending the shares of any airlines. He expects American to be the only carrier which will be even an average stock market performer, while UAL, Delta, USAir, Southwest and Alaska Air Group will all underperform the overall market into next year.
Air fares, currently higher than they were last summer, are likely to stay at this level, predicted Sanborn. Only when the economy shows signs of continued improvement will fares rise again, he believes. The industry, in his opinion, needs some time to heal itself.
"Every time that a carrier announces a bankruptcy it hurts the industry, because the major carriers fight to buy routes with money they don't have and they must also compete with the bankrupt carrier's cheaper fares," said Richard Foote, analyst with Argus Research Corp. "In addition, you can't expect lower fuel prices to help these stocks, since a decrease in oil prices has already been built into their stock valuation."
As a result of not knowing when a rebound will occur for the group, Foote recommends that all investors sell their shares of Delta, American, United, Southwest and Alaska Air.