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Will Airlines Get Off Tarmac?


Will moons align for airline stocks in 2008?


It was an earnings lift that sparked the airlines to percolate in late 2007 and was the impetus behind my interest and subsequent piece Will Airlines Take Flight?.

Thankfully, identified stops and a strict rule never to fall in love with any stock kept me from joining them behind the woodshed for the last several months as they tail spun to the depths of despair. Despite an irritating nick, the stocks never made my 'banned for life' list and I find myself once again intrigued by the theme.

Due to the continued improvement in fundamentals, the interesting technical action, and speculative interest sparked by recent 'merger' talk, let's take another look at the sector.

One of the biggest detriments to the airlines is the high cost of fuel. As oil continued to climb in 2007, heading towards the $100 mark that all eyes were watching, it was tough for these stocks to garner any interest due to the margin crunch the crude rise created.

Today however, with oil declining and depressed valuations due to the stock market issues, all moons may be aligning for these stocks in 2008. While it is an unlikely place to look for stock appreciation as most sectors continue to fall day in and day out, these stocks may actually continue to buck the trend and fly ever higher.

Airlines can be broken down into two categories, majors and regional carriers. The common belief is that a few majors will merge, reducing the competition while a few regionals may be tapped to enter the big leagues via a new name. Traders don't have to be an aeronautical expert to ride along if we take our cues from what the charts tell us.

The Majors

Northwest (NWA): I would debate that Northwest is a regional airline, but many classify the company as a major that currently has the most eyeballs as a buyout candidate. The stock saw a low of $10.70 on January 9, only to bounce over 80% before settling back in around $18.00 per share. A simple high percentage bounce isn't what is so intriguing but he way in which the technical action has come together has me taking a second look.

As the stock was declining in late December, going through what looked like tax loss selling, volume was escalating and the stock saw absolutely no bids at all. As the New Year arrived, the selling continued and the stock dropped another 40% in the first six days of trading.

On January 9 NWA hit a low of $10.70 before a major reversal and subsequent close at $12.01 on a surge in volume. The same day, the sector caught a UBS upgrade and discussion flowed regarding possible mergers in the group. The following day, the stock surged 31.97% while over 14 mln shares traded hands.

Over the next several days the gains held as volume dried up, indicating that the move was being digested in a very constructive manner and it was real accumulation pushing the stock higher, not just speculators looking to catch a move and flip shares higher. The general investing community believes the company is the most probably buyout candidate and the big question concerns at what premium.

Trying to play this from here is tricky but traders should watch for a move over recent highs of $18.80 signaling a new break above the down trend created since the shares started trading in May 2007. The challenge at this point is a prudent risk reward and while Northwest may be the most visible buyout candidate, the tide is rising with others that may present a better risk reward for traders.

US Airways (LCC): Another standout in the majors worth taking a look at is US Airways. The company recently reported a respectable quarter, booking $2.78 billion in revenue, but lost $0.87 per share due to the rising cost of fuel. Despite a crunch in fuel costs, the fundamentals are generally improving but what intrigues me the most about this name is the potential bottoming action I am seeing.

Unlike Northwest, which has already made a substantial 60% move, US Airways is up over 30% since its January 9 bottom. While still a hefty jump, the chart may be saying the stock has more "oomph" should it push through the recent high of $13.70. I stress "potential bottoming" because the pattern also resembles a bearish wedge. Traders may consider drawing a trend line from the recent lows to use as a guide and trailing stop.

Delta Airlines (DAL): Delta Airlines is also acting well after jumping over 31% and would intrigue me on a move over $16.70. The stock has been consolidating its recent run but looks to have a seller unloading shares on each breakout attempt. Once this seller is cleared I would expect this name to start heading back towards the low $20.00 mark in short order.

Regional Carriers

In the regional race, I am eyeing Southwest (LUV), and Airtran Holdings (AAI). Both stocks seem to have put in a bottom recently and are now digesting the most recent bounce.

  • Southwest has for years been viewed as the most efficient and rapidly growing air carrier, which now trades at 18 times 2008 and 14 times 2009 EPS estimates.

  • Not many individuals talk about Airtran but the chart is telling me something is going on that is worthy of our interest. The stock recently bounced off a low of $6.01 to settle in around the mid $7.00 level, promptly jumping another two points in a few days to hit a high of $8.99. Volume on both the last decline and subsequent ramp was the highest two-day volume surge it has seen since November 2006 and suggests a bottom may be in.

All eyes are focused on financials and retail but there is a stealthy move going on in the airlines that is worth noting.


Position in NWA.

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