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3 Airlines Riding the Economic Tailwind

Analyzing JBLU, UAL, and DAL from a contrarian background

by 1/28/2013 9:27:01 AM
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The long-standing joke about the airline industry is that if you want to lose a million dollars, invest $100,000 in airline stocks. After all, the industry as a whole has been historically in the red since it started -- in fact, the overall sector has not been profitable in terms of real dollars since it started carrying passengers back in the 1930s.

But several new trends and economic tailwinds have made the airline sector worth a peek, at least in the short term. First, automation, consolidation, and other efficiencies have helped drive out costs for all airlines, not just the so-called "low cost" carriers. This makes for more sustained profitability in a traditionally cyclical industry, even during the down times.

That consolidation could be continuing. Several reports today indicate that American Airlines, the operating branch of AMR Corporation (PINK: AAMRQ - 1.37), is close to finalizing a deal to merge with US Airways Group, Inc. (NYSE:LCC - 14.97). That would create the world's largest airline and comes after American had already gobbled up TWA and US Airways had merged with America West in the last 12 years. American, which recently unveiled a new livery and logo, is still in Chapter 11 bankruptcy reorganization that started in November 2011. The Fort Worth-based carrier has rejected one previous merger offer from Phoenix-based LCC.

Secondly, oil prices have remained generally stable at just under $100 a barrel. Jet fuel costs are typically an airline's highest or second-highest cost (with labor either No. 1 or 2). And while the current prices are a bit high for an airline's taste, it's the stability in the market that makes a difference. Wild swings put fuel hedges out of whack, while stability helps an airline plan longer into the future.

And finally, the slow-but-steady pace of the economic recovery has boosted the sector overall in the last six months. In fact, the Dow Jones U.S. Airlines Index (INDEXDJX:DJUSAR - 83.25) is up nearly 30% in the last three months, and more than 45% from its six-month low in early September.

We already covered why Southwest Airlines Co. (NYSE:LUV - 11.44) may be a good contrarian play on Thursday following the announcement of its 40th straight year of profitability.

But here are three other airline stocks on the move in recent weeks:

  1. Delta Air Lines, Inc. (NYSE:DAL - 14.17): The Atlanta-based carrier (which is the largest in the U.S.) reported earnings of 22 cents a share on Tuesday, beating Wall Street estimates by about a cent. This news helped push DAL's stock further along on its climb up the charts. The shares have jumped by more than 68% since hitting a 12-month low of $8.42 in early September, and are now trading at levels not seen in three years -- outperforming the S&P 500 Index (SPX) by nearly 37 percentage points in the last three months. The airline recently announced plans to more closely link its SkyMiles frequent flyer program to what customers spend on tickets (instead of simple accumulated miles), meaning a potential revenue boost (but also possible customer backlash). In the options pits, traders are optimistic as well. DAL stock's 50-day International Securities Exchange (ISE)/Chicago Board Options Exchange (CBOE)/NASDAQ OMX PHLX (PHLX) call/put volume ratio is 2.54, meaning 254 calls have been bought to open during the past 10 weeks for every 100 puts.


  2. United Continental Holdings Inc (NYSE:UAL - 25.50):The Chicago-based airline really struggled throughout 2012 as United worked to fully absorb Continental Airlines -- and subsequent problems from the merger scared a lot of passengers away last year. But the company and its stock appear to be on the rebound. The company's fourth-quarter loss of 58 cents a share was slightly better than predicted. Revenues are climbing (up to $37.15 billion in 2012), and the stock came in striking distance of a new annual high last Thursday after earnings were announced. Despite this promising rebound, options traders have rarely been more pessimistic. UAL's 50-day ISE/CBOE/PHLX put/call ratio stands at 1.20, just 4 percentage points above the 12-month high. In other words, option buyers have rarely been more put-heavy in the past year. That could mean potential upside from a contrarian perspective, especially with the stock's current short interest representing more than 8% of the stock's float.


  3. JetBlue Airways Corporation (NASDAQ:JBLU - 6.35): A relative baby, but certainly an innovator in the airline industry, JBLU is set to announce earnings this Tuesday. Wall Street is expecting a profit of about 2 cents a share, but JBLU has beaten those predictions in each of the last four quarters. And another encouraging announcement could keep the stock's current momentum: JBLU is already up more than 11% on the year, and up roughly 33% since its mid-November nadir of $4.80. And there is still more potential upside by way of analyst upgrades: seven of the 12 analysts covering the stock rank it a "hold," and another has it at "sell." But while Wall Street seems to be reserving judgment, option traders most certainly are not. JBLU's 20-day call/put ratio of buy-to-open activity at the ISE/CBOE/PHLX stands at 7.32 (so buy-to-open call orders have exceed put orders by a margin of more than 7-to-1 during the past month). Also, with short interest accounting for almost 17% of the stock's float ahead of earnings, a strong announcement -- coupled with continued upward momentum -- could lead to a short-squeeze rally, as bearish investors sell out to recoup losses as the stock shoots up.
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