Airlines

[godoftrading]

these stocks are all touching 52 week lows as oil continues to push higher....

anyone looking to buy or is there way to much risk in this sector....

im looking at JBLU or AMR.

AMEX AIRLINE INDEX
(AMEX: ^XAL)
Index Value: 20.84
Trade Time: 11:59AM ET
Change: Down 2.56 (10.94%)
Prev Close: 23.40
Open: 23.40
Day's Range: 20.56 - 23.40
52wk Range: 23.30 - 53.95

 

[Art G]

these stocks are all touching 52 week lows as oil continues to push higher....

anyone looking to buy or is there way to much risk in this sector....

im looking at JBLU or AMR.

AMEX AIRLINE INDEX
(AMEX: ^XAL)
Index Value: 20.84
Trade Time: 11:59AM ET
Change: Down 2.56 (10.94%)
Prev Close: 23.40
Open: 23.40
Day's Range: 20.56 - 23.40
52wk Range: 23.30 - 53.95

I used to love to play index options such as the XAL. I'm no bottom fisher so wouldn't even begin to try and call the bottom, but you may want to consider some straddles, if you're playing the XAL right here. JMO

 

[Trapshooter]

Four airlines bankrupt in last 6 weeks. Fuel prices skyrocketing. Way too risky for me.

 

[Art G]

Four airlines bankrupt in last 6 weeks. Fuel prices skyrocketing. Way too risky for me.

Buy puts.

 

[fmhealth]

God, has ANYBODY ever made any money trading airline stocks? On a more profound level. If you could possibly see to it that PYRO wins the Kentucky Derby on May 3rd, I'll never sell another option again. This time I really mean it!!

Keep up the good work. Another 400 point rally & I'll scream Halleluya!!!

 

[al_bundy]

i heard somewhere that if you add up the earnings for the big airlines for every year they've been in business than it would be a negative number

 

[ERD50]

i heard somewhere that if you add up the earnings for the big airlines for every year they've been in business than it would be a negative number

So all those people who laughed at the Wright Bros were right after all?

They shoulda stick to bicycles.

-ERD50

 

[MooreBonds]

i heard somewhere that if you add up the earnings for the big airlines for every year they've been in business than it would be a negative number

Yeah, I've heard that too - and it probably is one of the few often-used-phrases that's actually true.

Perhaps the only persistent 'industry craze' that cycles back every 8-10 years or so before repeating itself with (pretty much) everyone going bankrupt....selling new equity, existing bondholders have part of the debt converted to new equity....follow with 2-5 years of solid profits....rinse, then repeat with fresh bankruptcies. Repeat until you can't find any new [-]suckers[/-] investors.

Where "it really is different this time" never seems to sink in (hey, at least there aren't any more $2B IPOs for companies that don't have any revenue, profits, or even assets - just a cool-sounding .com address).

 

[chinaco]

I am beginning to see more and more discussion about an oil bubble. Deman has increased due to China and India... but there is much speculation built in also.

It might be a good time to begin taking energy money off the table. Oil prices will probably still be higher than a 5 years ago... but many are beginning to say that it will have a significant drop in price.

An analyst showed that it took oil 16 years to double in price. The recent doubling took perhaps 2 years.

Some other commodities are the same (much speculation)... for example rice.

 

[al_bundy]

i didn't get to read the entire book House of Morgan, but the airlines remind me of the railroads in the 1800's. back then everyone wanted to start a railroad and a common strategy was to start a new one next to an existing line and steal the customers. caused a lot of railroads to go belly up over the years.

replace this with airlines like JetBlue and Frontier springing up to compete with the big boys.

 

[frayne]

Watched an hour of congressional hearings last night on C-SPAN about the Northwest/Delta merger. A dude from the Brookings Institute laid out the problems with the major carriers/lagacy airliines very well. Bottom line, too many deep rooted animosities betweem labor and management which is hurting carriers. New upstart airlines don't have the baggage and will probably do well over the long term being competitive. The old majors will go by the wayside unless fundamental changes are made, soon.

 

[al_bundy]

a lot of pilots at the legacy carriers make well into the 6 figures and i heard some make over $200,000. don't really care myself, but the gross profit per flight is only a few hundred $$$. than you have the regular overhead and other expenses

 

[FinanceDude]

I wouldn't touch an airline stock with a 10-foot pole. Think about it, their largest cost is one that they have little control over.....that doesn't sound like a great business model to make money at............

Granted they use futures contracts to help lower their average cost of fuel, but their average cost of fuel continues to rise and their planes get older..........

 

[ERD50]

Granted they use futures contracts to help lower their average cost of fuel,

Wouldn't futures contracts *raise* the average price of fuel? Seems to me that all you can do with hedging is to get some predictability into your future fuel prices (which might be worth it to your business).

If they manage to actually lower their prices, the guy on the other end of the contract must have lost money. He isn't going to want to continue to do that.

-ERD50

 

[wildcat]

Jim Rogers made some positive comments about the international airlines recently in a Barron's interview. Not sure what is different about their business model or economics (any ideas?) but he has made some decent calls since I started following him although with that you never get a straight answer from the guy like - at what price did you buy? what have your returns been like? etc.

Link to the picks he covered in the article from stockpickr - financials listed are all shorts.

Stockpickr! Barron's Jim Rogers Interview Portfolio

 

[MooreBonds]

Wouldn't futures contracts *raise* the average price of fuel? Seems to me that all you can do with hedging is to get some predictability into your future fuel prices (which might be worth it to your business).

If they manage to actually lower their prices, the guy on the other end of the contract must have lost money. He isn't going to want to continue to do that.

-ERD50

What FD meant was that some airlines typically lock in future fuel costs via hedging with futures contracts.

In times of rising oil, it lowers their average cost because they're making money off of their hedging activities. If oil for some reason dropped by 50% over the course of 5 years, then it would be pretty hurtful to them...but, since there have been scant times when that has happened over the past 15-20 years, their oil/fuel hedging activities are generally beneficial to the bottom line.

It's true that the party on the other end 'lost' money - but that's the risk they took. Perhaps they were a producer who wanted to lock in a 'guaranteed' selling price and guaranteed profits based on their cost structure? Saying they 'lost' money is like the democrats saying that a 5% increase in a gov't program is a 'cut' - sure, the oil producer could have increased their income by selling at spot prices instead of taking on a hedge - but their crystal ball must have shorted out that day, so they weren't able to see into the future to know that they would have been better off selling @ the spot price 2 years into the future.

And you are correct that - all other things equal (which is hard to come by these days) - a hedge will cost the buyer the spot price plus the risk free interest rate over the course of the term of the hedge. However, given the cost structure of the airline industry, locking in a major expense is worth it given the forecast of oil prices starting in 1980.

 

[ERD50]

In times of rising oil, it lowers their average cost because they're making money off of their hedging activities. If oil for some reason dropped by 50% over the course of 5 years, then it would be pretty hurtful to them...but, since there have been scant times when that has happened over the past 15-20 years, their oil/fuel hedging activities are generally beneficial to the bottom line.

Sorry, I'm just not buying that explanation (but I appreciate the input).

If I'm the supplier, and I know as well as anyone that prices of my product are rising, why the heck would I contract to sell it at a price lower than that (factoring carrying costs, interest rates, etc)?

And you are correct that - all other things equal (which is hard to come by these days) - a hedge will cost the buyer the spot price plus the risk free interest rate over the course of the term of the hedge.

My point is, that on *average* (which is what FD said), it should work out just as you say, an added cost to the buyer. In the long run all things are equal, the estimates of the future prices of oil are as known to the buyers as they are the sellers. No one is willingly going to give up a profit, or pay extra. In the short run, there are winners and losers, but they both 'win' by getting a known price. If that did not have a benefit, neither would enter the contract.

Right? or wrong?

-ERD50

 

[MooreBonds]

If I'm the supplier, and I know as well as anyone that prices of my product are rising, why the heck would I contract to sell it at a price lower than that (factoring carrying costs, interest rates, etc)?

Well, did you sell your entire portfolio in 2001 and put it 100% into oil futures or oil-industry stocks? Why not? Surely you knew that oil prices were going to skyrocket?

The same reason you didn't sell and put all of your assets in oil stocks is the same reason that all oil producers don't simply sell all of their production on the spot market (many do, but many diversify at least some of their production to lock in profits). Not only do they not know the future, but even if they did - there are times of short-term price fluctuations entirely out of their control that have nothing to do with long-term fundamentals.

For instance, on the negative side - as oil dropped after the Katrina spike, many people payed MORE for gasoline. Why? Even though the price of gasoline is usually directly correlated long-term to oil, there were many gasoline storage problems post-Katrina that spiked the gasoline price due to supply-demand imbalances, even though crude was restored to a normal supply-demand balance.

And the opposite can hold true. There could be an economic blockade against a country, legislation could require the average car fuel efficiency doubles to 30mpg city by 2010, etc..... which could result in a short-term oil glut - making oil cheaper. Even though long-term oil will trend higher, there is a short-term supply-demand imbalance that is artificially dropping prices lower.

Sure, it would be difficult to imagine an over-supply imbalance in oil, but it could happen. Just like we all take insurance out on various risks (homeowners, health, life, LTC, etc.), some people more so than others, because we want to limit/lock-in our exposure despite having the odds in our favor.

My point is, that on *average* (which is what FD said), it should work out just as you say, an added cost to the buyer. In the long run all things are equal, the estimates of the future prices of oil are as known to the buyers as they are the sellers. No one is willingly going to give up a profit, or pay extra. In the short run, there are winners and losers, but they both 'win' by getting a known price. If that did not have a benefit, neither would enter the contract.

Right? or wrong?

I'm sure if you looked at all of the oil contracts traded on the NYMEX, it probably totals a scant % of total daily global oil production - so it's not like we're talking about 80% of all oil pumped is hedged.

The problem is precisely that no one DOES know what the future prices are. Do you know what oil will be at in 2 years? Neither do the airlines or oil industry producers. You even say yourself that they are "ESTIMATES". Estimates are not 100% accurate. So, both parties are willing to pay/receive a certain % above a strike price that is mutually agreeable to both parties in exchange for locking in a certain price, whether the current oil price is $10/barrel or $100/barrel. So when you say it's an 'added cost to the buyer' - it really isn't. If we knew with 100% accuracy that oil was going to be $100/barrel on January 1, 2010...then, yes, the future hedge would be an added cost to the buyer, since they could simply buy oil at 100/barrel without paying the cost of the futures contract today.

However, because we have no idea what oil will be at 2 years from now, I would argue that you can't truly say that it's an 'extra' cost, because the future cost is unknown - it's just part of the total cost they pay. It would only be an extra cost if you knew for certain what the future cost would be (if oil ended up at $50/barrel, then yes, you could say it was an 'extra cost'..but if oil jumps to $400/barrel, then you wouldn't say that the futures hedge premium was an extra cost, since their net fuel cost is much lower than what it would be unhedged).

 

[ERD50]

Well, did you sell your entire portfolio in 2001 and put it 100% into oil futures or oil-industry stocks? Why not? Surely you knew that oil prices were going to skyrocket?

I never said I know which way, or how fast fuel prices are changing - I was responding to your comment that hedging has been beneficial to buyers over the past 15-20 years, because prices have been rising.

Just because prices have been rising, we don't know that the futures contracts have benefited the buyer. Not unless we know what price and timeframe they contracted for. If the general outlook is for a rising market, no one is going to sign a contract to sell at the current price. So, it just depends who did the best job of estimating future prices. In the long run, I would expect it to average out. Future contracts are a zero sum game, and there are expenses.

Sure, it would be difficult to imagine an over-supply imbalance in oil, but it could happen. Just like we all take insurance out on various risks (homeowners, health, life, LTC, etc.), some people more so than others, because we want to limit/lock-in our exposure despite having the odds in our favor.

Right. And what I said is this doesn't lower your price over the long run, it just helps to make it predictable.

So when you say it's an 'added cost to the buyer' - it really isn't.

So then it is an added cost to the seller. Why would they do that?

None of this has anything to do with what oil does or does not do. You have people bargaining on both sides of the contracts with the same information. The buyers may be willing to pay a little premium over their estimates of future prices to gain some predictability. The sellers may be willing to sell at a small discount under their estimates of future prices to gain some predictability. They meet in the middle.

It's a win-win in the long run, or neither would do it. The seller does not want to discount too deeply - they are leaving money on the table. Companies are adverse to that. The buyer does not want to pay too high a premium, that cuts into profits. Companies are adverse to that.

So, under that scenario, how can the airlines routinely lower their costs with contracts?


-ERD50

 

[FinanceDude]

I never said I know which way, or how fast fuel prices are changing - I was responding to your comment that hedging has been beneficial to buyers over the past 15-20 years, because prices have been rising.

Just because prices have been rising, we don't know that the futures contracts have benefited the buyer. Not unless we know what price and timeframe they contracted for. If the general outlook is for a rising market, no one is going to sign a contract to sell at the current price. So, it just depends who did the best job of estimating future prices. In the long run, I would expect it to average out. Future contracts are a zero sum game, and there are expenses.

Right. And what I said is this doesn't lower your price over the long run, it just helps to make it predictable.

So then it is an added cost to the seller. Why would they do that?

None of this has anything to do with what oil does or does not do. You have people bargaining on both sides of the contracts with the same information. The buyers may be willing to pay a little premium over their estimates of future prices to gain some predictability. The sellers may be willing to sell at a small discount under their estimates of future prices to gain some predictability. They meet in the middle.

It's a win-win in the long run, or neither would do it. The seller does not want to discount too deeply - they are leaving money on the table. Companies are adverse to that. The buyer does not want to pay too high a premium, that cuts into profits. Companies are adverse to that.

So, under that scenario, how can the airlines routinely lower their costs with contracts?


-ERD50

The only airline smart enough to get some "sucker" to agree was Southwest Airlines. I think their "average" cost of a barrel of oil now is in the mid $40's. However, those contracts don't last forever, and they have to buy those contracts at higher and higher prices as the cost of oil continues to go up..............

I read somewhere that every 1 cent increase in jet fuel has an annualized effect of $10 million in cost to the industry.........that's not good..........