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Which Airline Stocks Still Have Room to Fly

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Not all airlines are overvalued.

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The airline stocks have been gaining altitude for some time now as revenue measurements increase and consumers start to travel again, but these stocks don't all share the same story.

The sector dipped sharply in Thursday trading after a slew of downgrades (and just a couple of upgrades) were reported by JPMorgan analyst Jamie Baker and his team. The airlines were down 4.51% in midday trading, while the S&P 500 was only off 1.92%.

JPMorgan's Baker acknowledges that the climate for airlines stocks has improved enormously over the last year as oil prices leveled off a bit and the economy has seemingly improved, taking away from worries that there will be more bankruptcies in the sector or that airlines will be jumping into risky mergers.

On Thursday, JPMorgan downgraded Continental Airlines (CAL), Delta Air Lines (DAL), and Alaska Air Group (ALK) to Neutral from Overweight, sending Continental's shares down more than 8%, Delta's down 7% and Alaska's off by 3%. The firm cited that the companies' share prices had reached levels that were in-line with historical valuations -- making it unlikely that these stocks will gain much value for investors.

According to the report, other airlines still trade at levels at a discount to their historical valuations, including US Airways (LCC) (which the firm upgraded to Neutral from Underweight), AirTran (AAI), American Airlines' parent company AMR Corp (AMR), and United Airlines parent company UAL Corp (UAUA).

"Oil and demand remain highly volatile, and are expected to largely form the industry's profit outcome in 2010. Ex-fuel cost trends, labor and capacity all appear largely in check, and are not expected to prove uniquely disruptive. We assume no specific acts of air-related terrorism," the report added.

The sector overall has been improving, with JPMorgan expecting the industry to hit an operating profit of $7.8 billion this year. Despite the sector upside, traffic reports out this week from the airlines were mixed.

Continental was the first major airline to report January traffic numbers. The company's load factor, the percentage of available seats, increased four percentage points year-over-year to 77.2%. Continental's revenue per available seat mile decreased 1% to 2% in January 2010, but is improving month-over-month -- December 2009 decreased between 2.5% to 3.5%.

American said that it filled 2.4% more of its empty seats in January 2010 over the previous year to report a load factor of 76.2%. Meanwhile, US Airways' traffic fell 1.4%, but passenger revenue per available seat mile increased about 2%. The airline is one of the few to report revenue measurements monthly.

Southwest Airlines (LUV), which reported its traffic on Thursday, flew 5.5 billion revenue passenger miles in January 2010, a 7.1% increase from the 5.1 billion RPMs flown in January 2009. Available seat miles decreased 6.7% to 7.6 billion from the January 2009 level of 8.2 billion. The load factor for the month was 72.1%, compared to 62.8% in the year prior. Passenger revenue per available seat mile is estimated to have increased in the 14% to 15% range compared to January 2009.

Yet, all of the positive numbers have to be taken with a grain of salt -- the numbers at the beginning of 2009 were dismal due to the Great Recession.
No positions in stocks mentioned.

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