Friday, September 25, 2009


Earlier posts have detailed my adventure in owning airline stock. I knew airlines were probably the worst industry to invest in, but Southwest, the best of the worst, was offered at a very attractive price. Rather than thinking, I bought and immediately started losing money. It took about six months of regret before the price returned to my basis. About 90 days after my exit, airline shares started moving upward. Have they ever. The airline ETF, FAA, is up over 100 percent in the last six months!

Does a 100% move mean the industry must be attractive? No, it means that the industry won't go bankrupt in the near term. New equity offerings and sale/leasebacks have raised cash for struggling carriers. Cheesey fees for bags, seat selection, and pets have juiced occupied seat revenue. But it is still a lousy industry. It requires too much capital, has unionized workforces, is subject to large fuel swings, and, mostly, faces pricing pressure from both leisure and business travelers. As usual, the optimists have gotten ahead of themselves and run prices up too fast.

I hope that I've got it right this time. Recently I borrowed some AMR shares and sold them short. American has enough money to continue to bleed for the next year and won't go toes up anytime soon. But it still must service a huge amount of debt, about 10Billion, with terrible operating margins. A difficult task. AMR recently sold equity and diluted the common shareholder, and issued debt at 10.5% for 3 years! They are staying alive, but at an expensive cost.

I think airline shares will go down; I know they won't go up another 100 percent. AMR is about as weak as they get. This time I picked the lousiest company in the lousiest industry and time is on my side.

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