Tuesday's Worst Industry in the World

Bad days. We all have them; some of us deserve them. Here are five stocks from an industry that, well, no one liked on Tuesday:

Company

Closing Price

CAPS Rating (5 max)

% Change

52-Week Range

UAL (Nasdaq: UAUA  )

$11.56

*

(6.92%)

$11.20-$51.60

AMR (NYSE: AMR  )

$8.20

*

(6.07%)

$6.81-$29.32

US Airways (NYSE: LCC  )

$6.87

*

(6.02%)

$6.10-$36.81

Northwest Airlines (NYSE: NWA  )

$7.72

*

(4.57%)

$7.06-$26.50

Alaska Air (NYSE: ALK  )

$20.60

*

(4.45%)

$17.44-$29.47

Sources: The Wall Street Journal, Yahoo! Finance, Motley Fool CAPS.

Nothing new there; airlines are either the Rodney Dangerfield of Wall Street, or the 98-pound weaklings that get sand kicked in their faces by Fools and analysts alike. It has to be frustrating, both for managers and frontline employees who've suffered years of pay and benefit cuts.

Hey kid! Have some more sand ...
The sad truth, though, is that the carriers are weak. Most of them wouldn't rate 98 pounds wearing a wet comforter. Warren Buffett explained why in his most recent letter to shareholders:

The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.

Ouch.

But he's right. Who really has a competitive advantage in the airline industry? Southwest Airlines (NYSE: LUV  ) probably gets closest, thanks to an impressive fuel-hedging program, but even that edge is eroding.

What's more, airlines are about to face a tougher FAA, just as labor relations are worsening. US Airways pilots oppose a merger with UAL and vice versa, and Delta (NYSE: DAL  ) has yet to broker a deal with pilots of soon-to-be absorbed Northwest.

Neither of those is as big a problem as oil, though. Yesterday, per-barrel prices came within spitting distance of $130. Earlier today, they touched $133. Since Jan. 2, per-barrel oil prices are up nearly 30%.

Here's the ugly truth, Fools. If you want airlines to be as they were, you have to accept that current fares are way too low, which leads to one of three outcomes:

  1. Fewer carriers and, thereby, less competition.
  2. The return of regulated routes and prices.
  3. A complete reinvention of the business.

Neither of the first two should sound good to managers, shareholders, or employees. I'm nearly as circumspect of the third idea, which Sir Richard Branson is trying with the launch of Virgin America. (And, frankly, with Virgin Airlines globally.)

Yet no carrier, no matter how creative, can raise prices or lower costs fast enough to offset a 95% year-over-year increase in fuel prices. No freaking way.

Airlines and their anyone-checked-the-price-of-oil-today business model ... Tuesday's Worst Industry in the CAPS world.

Do you agree? Disagree? Let us know what you think by signing up for CAPS today. It's 100% free to participate. I'll be back tomorrow with more stock horror stories.

Fool contributor Tim Beyers, ranked 15,876 out of more than 105,000 participants in CAPS, also writes for Rule Breakers. He hopes that Keith Olbermann doesn't mind the blatant theft of his "Worst Person in the World" segment from Countdown. Remember, Keith, imitation is the sincerest form of flattery.

Tim didn't own shares of any of the stocks mentioned in this article at the time of publication. The Motley Fool's disclosure policy thinks that cooked spinach is the worst veggie in the world.


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