Top Airline Stocks for 2011

Tourism industry had an upbeat outlook for 2011. Most of the travel agencies and vehicle rental companies expected a recovery in travel where the economy is coming out of the worst recession since WW II. Contrary to the hopeful outlook, the first quarter of 2011 started with shocks, political tensions in the Middle East and the devastating earthquake in Japan.

After the economic downturn in 2007 the airline industry lost a total of $25 billion in 2008 and 2009. However, according to an IATA (The International Air Transport Association) report, airline companies  perked up the industry with a $16 billion profit in 2010. IATA forecasts that airline industry profits would be somewhere in the $8-$9 billion this year, $7 billion less than 2010 but still profitable.

United Continental Holdings Inc (NYSE:UAL)

U.S. carriers are likely to pay a harsh burden for travel reduction. IATA’s profit forecast in 2011 for the U.S. region is estimated to be $3.2 billion which is less from $4.7 billion in 2010. Europe is no different. IATA forecasts that sovereign debt crisis in Europe is likely to have an impact on the travel sector. The loss could be somewhere in the $500 million ballpark.

Airlines are affected by rising fuel prices and seasonally by severe weather conditions in the U.S. The overall picture would be gloomier if some airlines didn’t hedge themselves against rising fuel prices. NYSE ARCA Airline benchmark index, which tracks 13 airlines, was down by 15% for the first-quarter of 2011 but it came back quickly to where it was 6 months ago.

In the light of this data here are airline companies at a glance:

Delta Airlines (DAL): Delta successfully merged with Northwestern airlines in 2009. This made Delta the top air carrier in the U.S. Unfortunately due to higher fuel prices and other factors like sluggish economy, in the first quarter of this year Delta lost $318 million, or 38 cents a share. It was still better than the analysts’ estimate of a loss of 50 cents a share. Delta fought with rising fuel prices by increasing fares by $10-$20 and especially for business travelers. Surcharges (extra baggage fees &last minute change penalty fees) were also very helpful for Delta to offset rising fuel prices. Delta might see some revenue growth when the summer travel season really kicks-off. In April, Delta announced that its traffic rose by %2.6 -thanks to international flights- compared to a year ago. George Soros had a $186 Million position at the end of December. Michael Messner’s Seminole Capital and Thomas Claugus’ GMT Capital are also among the hedge funds with DAL positions.

United Continental Holdings (UAL): In the first quarter United Continental reports an increase in passenger counts by %11. In the Q1 of 2011, UAL reported  net loss of $213 million or $0.65 (loss) per share. Fuel prices are still a problem. UAL paid an extra % 34.5 percent more in fuel costs compared to a year ago. United saw a significant jump in Caribbean travel, a sign of increasing tourism activity in the region. Bill Miller’s Legg Mason Capital had the largest holdings among the 300+ hedge funds we track. Leon Cooperman’s Omega Advisors, Andy Redleaf’s Whitebox Advisors, David Tepper’s Appaloosa, and Doug Silverman’s Senator Investment Group are among the hedge funds that are bullish about UAL.

US Airways (LCC): US Airways’ losses widened to $114 million in the first quarter of 2011, compared to a loss of $45 million in 2010. Fare increases saved the company from going into a deeper hole. Revenues in Q1 rose %11 from a year ago, however expenses moved into same direction rising %12.8 to $3 billion. The stock lost 71 cents per diluted share. LCC’s fuel costs increased by %37. US Airways doesn’t hedge itself against rising fuel prices, so any hike in the prices of fuel directly affects LCC’s bottom line. US Airways increased domestic fares by $10 or more on most of its flights. David Tepper, Marc Lasry, Cliff Asness are among the hedge fund managers who are bullish about LCC.

Southwest Airlines (LUV): First quarter of 2011 kicked off with positive numbers. The total operating revenue jumped %18 to $3.1 billion, in line with analysts’ expectations. However, profits declined from a year ago. Recently Southwest announced that it has closed on its purchase of all of the outstanding common stock of AirTran Airlines for $1 billion. This purchase will allow Southwest to acquire Atlanta Airport Hub which will add to Southwest traffic an additional 1/4 of its capacity. Jim Simons’ Renaissance, D.E. Shaw, and Phill Gross’ Adage favor Southwest Airlines.

Jetblue (JBLU): Jetblue had $1 billion in revenue growth and %16 year-over-year increase in capacity for the first quarter. Net income was only $3 million, or $0.01 per diluted share. The airline successfully hedged itself against rising fuel prices, %37 of its fuel consumption was hedged during the first quarter. JetBlue is giving increased attention to Caribbean and Latin America. Twenty five percent of the carrier’s 2011 capacity will be dedicated to these markets. In 2010‘s fourth quarter Caribbean & Latin America posted the highest unit revenue growth for the airline. The stock price is around $6 and analysts’ one year target price is $7. Andy Redleaf’s Whitebox Advisors had significant investments in Jetblue’s notes. Michael Johnston’s Steelhead Partners and Frank LaGrange Johnson’s LaGrange Capital preferred Jetblue’s stock at the end of December.

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