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Airline Stocks! The Disaster Movie

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There's an old saying in stock circles: "It's easy to make a small fortune investing in airlines. First, you start with a large fortune ..."

This week, we learned the worth of that ancient gem. You see, while suppliers like Boeing (NYSE: BA  ) appear to be off to a good start this year, when the Associated Press crunched some numbers this week, it came to the startling conclusion that -- gasp! -- U.S. airline companies remain a pretty poor investment idea. According to AP, recent earnings reports out of the four big "legacy" airline companies show "a combined loss of more than $1 billion for the first quarter" of 2011. Despite raising fares "seven times" in just four months:

  • American parent AMR (NYSE: AMR  ) lost $436 million.
  • Delta (NYSE: DAL  ) reported a $318 million loss.
  • United Continental (NYSE: UAL  ) lost $213 million.
  • US Airways (NYSE: LCC  ) reported a $114 million loss.

To find any good news at all in the industry, you have to travel downmarket to the likes of discounters such as Southwest (NYSE: LUV  ) or JetBlue (Nasdaq: JBLU  ) . Yet even there, you can count the millions they made on the fingers of one hand: $5 million for Southwest, $3 million for JetBlue.

Mistakes were made
Despite all the bad news, AP puts a positive spin on the airlines' tailspin, noting that as bad as things look, the losses so far have been "not as large as analysts had feared." Plus, management's aware of such issues as high fuel costs, and loss of Japan revenue (due to Fukushima), and airline execs are said to be "talking tough," planning to push through ever more price hikes (hooray?) and cut capacity until profits return.

All of which sounds good, until you remember that other old investing gem about airline investing -- the one penned by none other than Warren Buffett himself: "When management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact." Too true.

And I mean that literally. Too true.

Is there any hope for airline investors? If none of the above has succeeded in scaring you off (or if you're just a fan of disaster movies), then add a few of these stocks to your Fool Watchlist, and see how they perform. Click here to add Delta, here for Southwest -- lather, rinse, and repeat.

Fool contributor Rich Smith owns shares of Southwest -- the only airline he knows of that's never had an unprofitable year, and a Motley Fool Stock Advisor recommendation to boot. Check out his latest stock recommendations on Motley Fool CAPS. The Motley Fool has a disclosure policy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Read/Post Comments (5) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 27, 2011, at 6:13 PM, TMFDitty wrote:

    @dainish80: To the contrary! JPMorgan went suddenly "shy" a few months ago, and ceased reporting its ratings through for public review -- so it's hard to say whether its record is currently "excellent." What we do know is that, up until the time it "went dark," its record was anything but excellent:

    Buyer beware.


  • Report this Comment On April 28, 2011, at 12:12 AM, Ozcutty wrote:

    Buffet lost money when he was tempted by an airline in the 90's.

    Don't ever invest in them, they are economic nightmares. Huge costs i.e. planes ain't cheap! plus seem to lurch from one disaster to the next.

    Don't know why MF recommend Southwest, strange one that.

  • Report this Comment On April 28, 2011, at 9:59 AM, TMFGemHunter wrote:

    This article (and a host of similar ones that I've seen recently) are completely unfair to the airlines. It's a seasonal business, and Q1 is always the worst of the year. Aside from AA, which is a genuine value trap, all the others are projected to be profitable this year: even at $110/barrel oil. Most of the legacy carriers have trailing and forward P/Es of 4-6. Unless you think oil is going back to its 2008 highs this summer, you should be in airlines. (I'm long UAL)

  • Report this Comment On April 28, 2011, at 4:08 PM, Duke5343 wrote:

    except when price drops, I bought 1000's of United at $3-4.0 in 09, should of hung on by I fell to Jim Kramers HATE of airlines as he lost money on them in the 90's

    I could of made a BIG profit when United went to $24, but sold at $6 for small profit

    Airlines can make you money- BUY LOW

  • Report this Comment On April 28, 2011, at 4:20 PM, TheDumbMoney wrote:

    I don't understand why anyone in their right mind even considers putting money in an airline stock. I'm not kidding, I would rather invest in Kewpie dolls and buggy-whip futures than invest in any airline stock I have ever heard of in my whole entire life, unless I could have been prescient enough (or old enough) to get in on LUV at the very beginning.

    Airlines are fundamentally a utility-like industry, but with worse returns and more risk. I have recently begun to think they should never have been deregulated. Routes should have been assigned and they should have continued to be allowed to charge enough to generate a reasonable rate of return on investment, which is more than many get nowadays.

    IMHO nobody should even consider investing in any airline unless it is totally disrupting the established model, as LUV once did, and even then there are probably better opportunities.

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