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Rethinking Legacy Airlines

By Tim Beyers
January 6, 2005

I'm slowly starting to fall in love with the legacy airlines. Though it's certainly true I've made a mockery of US Airways (OTC BB: UAIRQ) and even UAL Corp's (OTC BB: UALAQ) United over the past several months, I believe an opportunity is forming.

Yeah, I know how bad it is for the big guys. Each day more ugly news piles up: Oil prices remain high, consumers continue to demand low fares, and discount carriers such as Motley Fool Stock Advisor pick JetBlue (Nasdaq: JBLU) and Southwest (NYSE: LUV) continue to compete aggressively. But anytime there's doom and gloom in the markets, or in an industry, shrewd investors stand to profit.

Consider Peter Lynch, who in Beating the Street described how as the Dow was cratering, he was buying, often into stocks stuck in troubled, unloved industries. Unsurprisingly, Lynch did well. Why? Because even stocks with staying power can be guilty by association with a poor industry, and that can create bargains.

That's why I'm thrilled by Delta's (NYSE: DAL) price cut announcement. The carrier's most expensive fares are being slashed dramatically, some by more than 50%. US Airways and Northwest (Nasdaq: NWAC) both quickly aped the cuts, but, in doing so, Northwest denounced the move, saying in a statement that it would "immediately adversely and significantly affect the airline industry." Indeed, some estimates say that if all major carriers introduce similar cuts it could cost the industry as much as $3 billion.

If true, investors should expect only the strongest of the remaining legacy carriers to survive. And for clues on that, let's turn our attention to the balance sheets of the major airlines. We're looking for the ones with the greatest tangible net assets -- that is, anything has a material value that could be liquidated to help ride out hard times. We'll exclude the bankrupt carriers since we can't yet predict what their overall capital structure will be. Have a look:

Airline Cash & Investments Debt Tangible Net Worth
American $3,616 $14,383 -$1,545
Continental $1,731 $5,845 -$296
Delta $1,755 $12,766 -$5,759
Northwest $2,541 $8,538 -$3,172
Southwest $1,876 $1,923 $5,504
* Numbers in millions. Data provided by
Yahoo! Finance and Morningstar.

Of the legacy carriers, Continental (NYSE: CAL) appears to me as the most stable. But check out Southwest. Its capital structure is so well-formed that it can easily afford to move into Pittsburgh to muscle in on US Airways' business.

Do the legacy carriers have deep problems? Of course. Do they need to dramatically overhaul their cost structures? Undoubtedly. But one of these carriers will emerge with the staying power to be the dominant global U.S. carrier. Looking at the balance sheets today, I'd put my money on American or Continental. But don't count out United yet. If the carrier makes it out of bankruptcy with much of its debt load eliminated, it, too, could become an attractive buy.

For related Foolishness:

What do you think? Are there investing opportunities in legacy airlines? Or should Foolish stock pickers keep the big carriers at arms' length? Who will Delta's move hurt the most? The least? Debate all this and more at the Airlines discussion board. Only at Fool.com.

Fool contributor Tim Beyers doesn't own shares in any of the companies mentioned in this story but some members of his family are retired from United Airlines. To see what stocks Tim owns check out his Fool profile, which is here.