By Kyle Shen
In 2007, Warren Buffett lamented that “if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”
Unfortunately, for modern investors, airline stocks are as uncontrollable and prone to failure as that rickety, by-the-seat-of-the-pants first flight.
On March 23, Hunter Keay, an analyst at Stifel Nicolaus (SF), downgraded the stocks of five major airlines: Delta (DAL), Continental (CAL), United (UAL), Southwest (LUV) and AMR (AMR), the parent of American Airlines. The ratings on all five were switched from ‘Buy’ to ‘Hold.’ Of all these companies, Delta seemed to be in the best shape due to its large size and cash position, but was still vulnerable to the trends plaguing the market.
Keay warns at least one airline bankruptcy could be in the cards:
We see the potential for a credit event for at least one major U.S. airline later this year or early next year if current demand trends continue and the capital markets remain effectively inaccessible.
The reasons for this poor diagnosis are factors beyond the control of the industry.
The downward spiral of the economy means an increase in unemployment. When people are out of work, they tend to save more and spend less on luxuries such as travel. Plus, cargo volumes have followed a steeper downward trend, with a 23% decrease in January.
The one aspect looking up for the airlines is cheap fuel costs. But even cheap fuel is a bright spot that Keay predicts is likely to darken. “It appears crude oil prices are stabilizing and potentially ready to rise,” he writes.
Airlines used to file bankruptcy as a way out of tough financial situations. But, unlike in previous downturns, declaring bankruptcy now means not salvation as much as possible destruction. A few months ago, BusinessWeek’s Dean Foust addressed the possibility major U.S. airlines could disappear in the current downturn.
Cost-cutting can help airlines, but only so much. Most carriers can merely pray the economy will improve and pull them out of their nosedives.