Airline stocks recover from a bummer summer

AP News
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Posted: Dec 18, 2009 11:54 AM

Pilots say a good landing is one you can walk away from. Airline shareholders who hung on while their shares scraped along this summer probably feel the same way.

Airline shares plummeted over the summerThe recession kept business travelers home or in the cheap seats, and fuel prices remained stubbornly high. Analysts started labeling some airlines as "survivors," and talked about "liquidity" risk at American and _ especially _ United Airlines and US Airways.

But since July 1, shares of United parent UAL Corp. have more than tripled. American Airlines parent AMR Corp., Delta Air Lines Inc., and Continental Airlines Inc. have nearly doubled. The rally has gained steam since Thanksgiving, with the six biggest carriers up 20 percent to 55 percent.

Why the bounce? Standard & Poor's equity analyst Jim Corridore gave three reasons:

_ November reports suggest that airline revenue stopped getting worse and even started to improve.

_ The economy appears to be getting stronger, and airline finances are tied closely to economic growth.

_ "Hope springs eternal." Airline shares often benefit from optimism that next year will be better, and this year there are good reasons to think that may be true.

Analysts have sounded more positive on airlines. Stifel Nicolaus analyst Hunter Keay has a "buy" rating on Delta, UAL and JetBlue Airways Corp. He said there's a good case to be made that the rally will last. It's based on real improvement in airline revenue, he said, "not some sort of short-term trading anomaly based on crude prices."

"Even after a 30, 40 percent run, the valuation still appears to be compelling," he said.

Keay and other analysts are quick to point out that airline shares could give up those gains quickly if the good-news scenario doesn't play out. That would include swine flu being worse than expected, a double-dip recession, or another spike in oil prices.

And analysts are not equally enthused about all airlines. Keay has a "hold" rating on Southwest, saying its shares are the most expensive among airlines compared to expected 2010 profits. And on Friday he downgraded Continental from "buy" to "hold" because he thinks its shares don't have much more room to rise for now.

Airline investors have been here before.

From July 21 to Aug. 18, 2008, airline shares rallied as fuel prices retreated from a summer spike, and before the financial crisis set in. UAL shares tripled to $14.94. AMR rose almost 70 percent to $11.43.

The recession brought them back down again early this year, which is a good reminder that airline shares can leave investors queasy. They can bounce up or down 5 percent or more on any given day. Friday is a good example. Shares of several airlines tumbled more than 5 percent around midday as oil prices rose. Many people buy or sell airline shares as a way to bet on the direction of the economy, or oil prices. Jet fuel is one of an airline's biggest costs.

"They're not buy-and-hold stocks, they're not in general what you would call 'investments,' S&P's Corridore said. "They are stocks that you move into and you watch carefully and you get a gain and you move out."