Airline Stocks – Can See but Cannot Touch, Not Yet

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Jun 24 2008
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Before the invention of internet on the scale we’re seeing today there were not many nice and exciting stocks investing game around. If my old memory still serves me right, the games available during the old time were developed for MS-DOS, the oldest Microsoft operating system. Somehow I was hooked to this simulation games on stocks, never mind the design was rather primitive. The joy of making huge amount of money from investing stocks was indescribable. What you need to do was to enter the stocks and shares to buy and randomly the game will tell you the result after the opening bell together with the news that effect such result.

It was a simple game but it was my first exposure to stocks and since then I‘ve never looked back. Strangely I found out that to make millions of dollars in profit you cannot ignore airline and steel stocks. It was a risky business – either you go bust or become very rich. Of course you didn’t have technology stocks back then. Talk about airline stocks, do you know that Google Inc. (Nasdaq: GOOG, stock) can basically buy over all of U.S. major airlines and still has many billions left inside the pocket? Of course Google will not do that but using market capitalization as yardstick, Google which has a mind-boggling US$171 billion could swallow companies such as Delta Airlines Inc., UAL Corp, U.S. Airways Group Inc., Northwest Airlines and Continental Airlines Inc.

Airlines stocks CAL NWA DAL LCCSince the escalation of oil prices airline stocks has been beaten down; so much so that it is hard to tell if the stocks are ripe to pick. Simple moving average tells you the beating is not over yet but certain analysts (such as from Lehman) are bullish on the sector. No doubt the airline stocks look awfully cheap but one should remind oneself that such stocks are at the mercy of global oil prices, jet fuel to be precise. If I’m not mistaken, during my time playing the MS-DOS simulation stocks game many times the airline stocks went bankrupt. Chapter-11 is the last word investors would like to hear. Warren Buffett once tried his luck with a company which is now known as U.S. Airways but got burnt and since then he has been telling people to stay away from airline stocks.

Of course you might argue that the airline industry in the 90s was very different from now. Furthermore Warren’s style of holding on to his stocks almost “forever” does not work on airline stocks. Some might argue that if the 911 didn’t kill U.S. airlines and economy, what justifications are there to say airlines will, well, go under Chapter 11 again? As an investor or trader what are the options available to you? You can allocate your money elsewhere and forget about airline stocks temporarily or you can try to become hero and scream that the airline industry is in such a bad shape now that it can’t get any more worse but to go up.

Airasia stock chartI bet many people poured lots of monies into AirAsia Berhad’s (KLSE: AIRASIA, stock-code 5099) when the stock breached the psychology level of RM1.00 a share. What happens to the stock today? The stock still drops. Besides the childish fights between AirAsia CEO Tony Fernandes and Malaysia Airline System (KLSE: MAS, stock-code 3786) CEO Idris Jala, both airlines are struggling to stay afloat. However credit should be given to AirAsia when the company managed to stay profitable with profits rose to RM161.3 million (from 86.9 million ringgit in the same period a year ago) for the three months ended Mar 2008; on revenue growth of 31.8 percent to RM535 million despite escalating jet fuel.

MAS stock chartAirAsia might be innovative by exploring ancillary income to cover the rising cost of jet fuel which has surged almost 100% when other airlines including MAS chose the path to raise fuel surcharge but the fact remains the airline companies are chasing the shadow of oil prices which could hit $200 a barrel – that’s if you choose to believe such oil prices could happens. If AirAsia’s plan to raise ancillary income from current 9% to 13% to its revenue succeed, that’s RM360 million which could pays many liters of jet fuel. Having said so, it’s still too early to munch both stocks – either MAS or AirAsia. Fundamental aside, I believe technical analysis is telling us the support level is still very cloudy at this moment.

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Like I’ve been saying, the best play will be playing the bonds after they default.

thanx mike for your comment but i guess not many people know how to play the bond game …

cheers …

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