1 reply to this topic

[SilentOne]

LUV has not moved with the sector. It is still clearly head & shoulders above the US airline industry. Got a mention in Fortune last month as well. It broke the 6 month downtrend line yesterday. Daily on a buy. Took at small positon here and will add. cheers, john

[SilentOne]

While I think we can expect an oil bottom very soon, we can also say good bye to $80 oil for a while.

Oil Prices, Merger Talk Fueling U.S. Airlines Stocks


18:06 EST Thursday, January 11, 2007

CHICAGO -(Dow Jones)- U.S. airline stocks are expected to keep gaining altitude in the first half of 2007, fueled mainly by lower oil prices and a growing economy - as well as the allure of industry consolidation.

In recent days, some analysts have raised their 2007 earnings forecasts for airlines, and some of their stock ratings also have gone up.

The main driver is falling oil prices, since, for many carriers, jet fuel is their single biggest expense. Crude oil futures on Thursday fell below $52 a barrel to a 19-month low, down from a high of $78.40 per barrel in July.

With an industry turnaround in the air, the AMEX Airline Index has risen almost 10% in the past month. Shares of American Airlines, a unit of AMR Corp. ( AMR), Continental Airlines Corp. (CAL), JetBlue Airways Corp. (JBLU) and United Airlines, a unit of UAL Corp. (UAUA), all reached 52-week highs Thursday.

The Air Transport Association, the industry trade group, is forecasting that U.S. airlines will show their first annual profit in six years when they report 2006 results this month. Overall, the industry is expected to earn between $2 billion and $3 billion in 2006, with profits rising to $4 billion in 2007.

Revenue growth may slow this year as the U.S. economy cools, but that's likely to be mitigated by lower energy prices, according to Michael Linenberg at Merrill Lynch. He expects airline stocks, on average, to rise 20% to 30% this year.

Many Merger Scenarios

News surrounding potential airline mergers, highlighted by US Airways Group Inc.'s (LCC) hostile bid for Delta Air Lines Corp. (DALRQ), is also attracting investors. According to David Strine, airline analyst with Bear Stearns, " Consolidation in the airline industry is like rocket fuel for equities. For a period of time, it will likely drive better revenue through capacity cuts, and revenue and cost synergies." Daniel McKenzie at Credit Suisse thinks US Airways' bid for Delta will fall through. But he has a dizzying array of M&A possibilities on his radar screen. He thinks Delta might choose Northwest Airlines Corp. (NWACQ) over US Airways. That potential link-up could prompt American Airlines, currently the world's largest airline, to make a competing bid for Northwest. As well, a Delta/Northwest pairing might trigger a merger between United and Continental, McKenzie said.

McKenzie has an overweight rating on the airline sector, with some top picks among faster-growing low-cost carriers, including Southwest Airlines Co. (LUV), JetBlue and US Airways.

Ticket Prices Likely To Rise

Analyst Ray Neidl at Calyon Securities thinks investors should get more aggressive as the airline industry approaches seasonal and cyclical peaks. On Wednesday, he raised his ratings to buy from add on American, Continental, United, and US Airways, with price targets of $41 for American, $60 for Continental, $59 for United, and $74 for US Airways.

He said the shares could rise even higher if oil prices fall further, or ticket prices go up, which he calls "probable". Neidl's fundamental assumptions include oil prices around $60 a barrel, GDP growth of 2% to 3%, load factors - the number of filled seats per plane - holding steady at current high levels, and capacity growth less than 4%.

Airline stocks traded higher Thursday on falling oil prices. Shares of American closed at $37.94, up $1.94, or 5.4%; Continental at $49.36, up $1.91, or 4%; JetBlue at $16.09, up 22 cents, or 1.4%; US Airways at $61.20, up $2.27, or 3.8%; Southwest Airlines at $16.15, up 10 cents, or less than 1%, and United at $50.08, up $1.23, or 2.5%.

Analysts mentioned don't own airline stocks, but their companies may have financial relationships with airlines.

-By Ann Keeton, Dow Jones Newswires; 312-750-4120; ann.keeton@dowjones.com