Tags: Airline | Stocks | Oil | Prices

Analyst: Be Careful Investing in Airline Stocks Amid Lower Oil Prices

Thursday, 28 Jun 2012 10:10 AM

By Nancy Stanley

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Cheaper oil prices are usually good news for airline stocks, but you need to be careful which ones to invest in because airlines can capitalize on lower oil prices in different ways, Hunter Keay, senior analyst at Wolfe Trahan & Co., told Fox Business.

“If you're going to be trading airlines based purely on oil prices, you’re going to want to look at the ones that don't hedge fuel. And that's only Allegiant Travel Co. and US Airways Group Inc.,” he said.

“Every other airline has some degree of hedge exposure and a lot of those airlines, with the exception of Alaska Air Group Inc., have put on collars—they’ve created floors above the spot price. So they're not going to be participating fully in the falling commodity prices,” Keay added.

He explained that to protect the upside, most airlines sold calls to buy puts—or vice versa depending on which way oil was going—and they essentially created a collar position, “which is now underwater.”

While Keay is not a fan of all airlines, he is a big fan of Allegiant because it continues to diversify its business.

“They get about 35 percent of their pretax income from selling packages—hotels, rental cars—and it’s a very stable business model,” he told Fox Business.

“And they've got some really exciting IT overhaul initiatives in the pipeline,” Keay noted, adding that at some point travelers may be able to get a hotel room, a rental car and airfare on a different airline all on Allegiant’s website.

United Continental Holdings Inc. has had a tough year so far, he said, as integration with the Continental merger has not been going well.

“They've underperformed peers on revenue, and in my opinion, sentiment in the investor community is pretty negative on United, which I think creates opportunity because the stock is cheap. They’re still doing a lot of really good things,” Keay stated.

Keay predicts the stock can outperform in the last half of the year and next year.

While he isn’t a fan of Southwest Airlines Co., “I think on an absolute basis it is going to be just fine just because we’re so bullish on the group overall,” Keay said. “But I think it's going to be a relative underperformer in the sector. The shares are little expensive, they value brand, they subsidize frankly happy customers and labor through equity investors and that's really not a position that we like to be in.”

While customers complain that low-cost airlines sometimes have higher fees, they still choose these airlines, he told Fox Business.

For example, Spirit Airlines Inc’s average fair is $77 and they collect $52 per passenger in fees each way.

“Even with that $120 all-in cost, it’s still about $25 below JetBlue Airway Corp.’s average fair,” he said. “And customers get to pick and choose what they use and modify their behavior to avoid all these fees, which is what Spirit wants.

“Because if they pack less bags, it costs Spirit less money to fly them around,” Keay added.

“Spirit and Allegiant are pretty much neck and neck at this point. I think you can do well in either one of those right now,” he said.

Airline stocks have risen into the top 10 industries among the 197 industries that Investor’s Business Daily tracks.

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