Airlines

Airlines stocks has recently taken a pounding thanks to higher oil prices, continued competition for market share and the perception of a slowing economy. In fact most of these stocks are down near their 52 week low, having just bounced off of these levels recently. The legacy carriers (Amercian Airlines, United, Delta, Continental, Northwest, US Airways) aren’t the only ones getting hurt, the regional airlines are also getting squeezed, Aloha airlines just declared Chapter 11 last week due to heavy competition for inter-island travel in Hawaii.

So, what are the airlines doing to halt this decline in fortunes? There are a few things that airlines can do to hold on to their profit levels:

1. Raise fares, the last round of increase in prices initiated by United seem to be holding so far, everyone else is following suit.
2. Mergers, this would allow airlines can reduce overheads and get more structural efficiency, the most prominent of late being Delta and Northwest, although that merger has been nixed by the pilot union.
3. Restructuring, if merger is not an option, then restructuring becomes the next likely option, this is something Delta is exploring in the wake of failed merger talked with Northwest.
4. Cut back capacity on domestic flight and increase international travel. The advantage there is that international travel is more profitable in comparison to the domestic market and the market still has significant room to grow.
5. Remove older and less efficient aircraft from service. This reduces the operational cost of running an airline.

But each of these options can be risky. For example, raise prices too much, and cost conscious travelers cut back. This is also true for businesses that are mindful of increasing costs. Mergers typically do not work well, one prime example is the merger of US Airways and America West, after three years, the two companies still hasn’t fully integrated their operations. Restructuring could cause unions to launch into strikes which can cripple operations. Fare hikes aren’t always sustainable as airlines love to compete for market share, which often means that price hikes are likely to devolve into price wars.

So, what does this all mean for the stocks of these carriers? It means that the stocks are highly volatile and extremely dependent on the price of oil. The play in airline is highly risky, but a good short term could be to buy airline stock on the day when oil prices has risen near its peak ($110), and selling as oil drops (below $100). This should make some quick money, but requires a lot of attention on a minute by minute basis. Out of the group listed above, United (UAL) is probably a good candidate, aside from the stock’s inverse relationship to the price of oil, this is the most likely merger prospect of the entire group given how much its CEO has focused on the subject.

Remember, trading in these stocks are not for the faint of heart. The airline business in the US with the exception of Southwest have never been profitable, so, don't count on the earning reports to give a boost to the stock, and never keep airline stock for the long term.