Due to the recent surge in oil, the airline sector is trading down more than 10%. Since the violence broke out in Libya, United Continental Holdings (UAL) is trading roughly 11% lower, American Airlines (AMR) is off 9%, Delta is down 10%, and US Airways is lower by about 7%. So is now the time to take advantage of these lower prices and buy these stocks?
According to Ray Neidl, an analyst with Maxim Group LLC, it is. Neidl says, “Overall, our outlook for economic growth, travel demand and the potential for more ticket-price increases and yield-tightening remain positive. We also believe that fuel costs may be near their top, which should provide U.S. carriers with a very strong 2012 as fares continue to rise.”
Between his comments and the rally in the stock market, the NYSE Arca Airline Index (XAL) traded up almost 2% yesterday. That’s especially impressive because WTI crude oil closed above $102 due to the air attacks on Libya over the weekend. Airlines usually move inversely with oil prices due to jet fuel costs.
Yet, I have trouble condoning Neidl’s opinion.
To me, investing in the airline sector isn’t attractive, especially in the short term. First, airlines are subject to wild swings in jet fuel prices. Though some airlines hedge oil costs, not all do and no matter how hedged they are, soaring oil prices is going to affect all airlines to some degree.
Though Neidl thinks that oil prices have peaked, I bet he would sing a different tune if the violence spreads to Saudi Arabia, Iran, or Kuwait. Though this is unlikely, I don’t think it can be ruled out.
Second, I am seeing significantly higher prices for flights. Though WTI crude oil is trading up about 13% for 2011, air fares up 20% – 50%. As a New Yorker who often travels to San Diego to see his family, I am used to paying roughly $400 for a round trip non-stop flight a few months in advance. Now most of the flights are between $500 and $700!
Therefore, it’s hard for me to believe that the average traveler is flying as much when prices are so high, our labor market is still underperforming, and the housing market is in the dumps.
I’m going to stay away from investing in airline stocks at these levels. I just don’t think the risk/reward ratio is in my favor. There are too many factors that could weigh on the airlines and taking all things into account it’s hard for me to believe that these companies are going to beat their earnings estimates when they report in April.
What do you think? Do you think now is a good time to invest in the airline sector? Are you seeing higher prices for airline tickets? Email me at firstname.lastname@example.org