Airlines in Trouble -- 5/28/2008

Airlines are facing some of the biggest losses they have seen, ever. With the price of oil now higher (inflation adjusted) than the oil crisis of the 1970s, airlines are facing a challenge which seems insurmountable.

ATA, Frontier, etc. We have already seen bankruptcy in some of the smaller ones. The larger ones are cutting costs any way they can, but it is not enough. What are some things that could happen?

Remember TWA and Eastern airlines? Organized Chapter 7 liquidations seem unavoidable if oil continues to rise, or even if it stays where it is possibly. This allows bond holds to recoup some to most of their investments, and then allows other airlines to pick up operating assets very cheaply. Of course, the common shareholder is left holding the bag. I still see the TWA service carts all over American Airline planes. What else could happen?

Globalization. We could see consolidation to such a degree that some of the global players get involved. Also, more Southwest type operating companies are really needed. More efficiency. More costs will continue to be past on to the consumer.

I would expect airline ticket costs to skyrocket uncontrollably as these airlines try to keep pace, especially if oil continues to rise towards $150. We are seeing small pullbacks in oil, but with almost no momentum (not good).

We said months ago not to invest in any airline stock picks, and we hold to this especially now. Stay away. Even from Southwest at this point.

Excluding transportation, durable goods orders did much better than everyone thought. Orders for appliances like dishwashers and refrigerators did much better than expected. Non-consumer items like orders for aircraft and equipment were not so good though. Definitely some conflicting data from the consumer point of view, but not from the corporate point of view. However, the consumer will constrict on these high oil prices, and these numbers were for last month. This month will be an interesting read.

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