Airline shares and oil prices used to move together like kids on a teeter-totter, with one rising while the other falls. But the financial crisis affecting the United States and other countries has thrown that wisdom out the window.
Investing in airlines for the long-term can be risky and not always rewarding, as four major U.S. carriers have filed for bankruptcy protection since 2002, wiping out their pre-Chapter 11 shares. Fort Worth, Texas-based AMR Corp., parent of American Airlines, which avoided bankruptcy, has not paid a dividend to common shareholders since 1980, a spokesman said.
For much of the third quarter, some short-term investors were able to make money from big swings in airline shares that had more to do with the price of oil than the fate of Wall Street firms. But the broad reach of the financial crisis may have severed that connection.
“In the past two weeks, it's a different story,” Calyon Securities airline analyst Ray Neidl said. “The credit markets are affecting the overall market and that's what is affecting everyone and what the impact will be for airlines in terms of demand.”
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As oil prices plunged about 38 percent from around $147 a barrel on July 11 to around $91 a barrel on Sept. 16, shares of the big six legacy carriers soared – in Tempe, Ariz.-based US Airways Group Inc.'s case, its stock more than quadrupled over that period. The Dow Jones industrial average was nearly unchanged.
From that point through Wednesday, oil prices fell another 2 percent to about $89 a barrel, and shares of the six airlines sank. In the case of Chicago-based UAL Corp., parent of United Airlines, its stock shed more than half its value over the three weeks. The Dow, meanwhile, fell about 1,800 points, or about 16 percent.
“The old saying is, ‘You can't fight the tape,' and that's what airline stocks are up against right now,” Neidl said.
Stifel, Nicolaus & Co. analyst Hunter Keay said in a recent research note that he sees significant upside potential for domestic airlines, particularly shares of Atlanta-based Delta Air Lines Inc., which he believes are significantly undervalued. The carrier expects to close its acquisition of Eagan, Minn.-based Northwest Airlines Corp. later this year.
Several major airlines have moved aggressively to shore up their cash positions. The specter of bankruptcy that was back on airlines' and analysts' radar screens in May has seemed to diminish in the months since. Some airlines, which have benefited from significant capacity cuts and new fees they have been charging customers, have even been talking about posting profits.
For now at least, airline investors seem to be largely ignoring carriers' improved balance sheets. With the U.S. economy in turmoil, could investors be worried about demand for air travel falling off?
“I think the airlines have a handle on it right now,” said Minneapolis airline expert Terry Trippler.