Dear K.R.: I don't like airline stocks because the industry is in the middle of a seemingly inexorable decline in the sale of first-class, business-class and commercial ticket sales -- the most profitable tickets sold.
I don't like the airlines because I sense that leisure traffic will continue to fall. I don't like the airlines because carriers have extremely high debt-to-capital ratios between 90 percent and 100 percent. And I don't like the airlines because their limp management, like the automobile industry, allowed the unions to suck them dry.
Suffice it to say that shares of American Airlines (AMR -- $8.47) are flying low, and debt represents 100 percent of its capital. In addition to all the above, AMR has two other significant problems: (1) Its unions -- AMR's labor costs are 26 percent higher than those of other legacy carriers and (2) AMR is strangled by an great shortfall in its pension plan that will require well over a billion dollars in cash, not stock, to satisfy participants.
Now, Southwest Airlines (LUV -- $11.75) specializes in short hauls, low fares, no frills, friendly skies and carries more passengers than any other carrier. Operating margins are strong, and debt represents 39 percent of capital. New markets should perk up LUV's revenues and earnings in 2010.
I like LUV; I like its balance sheet and income statement; but I do not like the stock. The industry is between a rock and a hard place for at least another dozen months.
Now, I know that the best time to buy a stock is when things couldn't look worse, but I think things could look a lot worse in the airline industry.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com.
