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Domestic Airlines: “Charging” Ahead

Posted February 7, 2008

"As investors, this is a unique opportunity. In the short term, merger talks will likely be detrimental to share price, giving options players and short sellers some moneymaking opportunities. But for long-term investors, merger news gives folks a shot at a fantastic entry point.  " – Andrew Snyder 

By Andrew Snyder 

Baltimore (TFN) — Over the past two months, I have spent way too much time sitting in some dirty airport terminal chair waiting for my plane to begin boarding.  Traveling can be fun, but when I make weekly trips to an airport and live out of a suitcase in some downtown hotel, I tend to get pretty grouchy. It gets old real fast.

I just finished unpacking from a month on the road, or should I say in the sky.  Now I've got a few weeks at home, then I get right back into another month or so of lugging a suitcase from town to town.  The second leg of my travels may look much different.  The airline industry is going through a major transformation.

Yesterday morning, I flipped open the business section of a major national newspaper and the very first article discussed how United Airlines and its parent company UAL Corp. (UAUA:NASDAQ) are now charging passengers $25 for the luxury of checking in their second bag, a move that 25% of its passengers make.  The surcharge is necessitated by soaring costs, especially soaring oil prices.  Experts believe it will save the airline over $100 million each year.

Stealing the headlines

Did this story deserve front-page attention?  Absolutely not.  It was nothing more than a public relations office stunt to get folks talking about the airline (hey, it worked). The real news is going to come in the next few weeks when UAL Corp. announces it will merge with Continental Airlines (CAL:NYSE).  Neither of the companies will acknowledge the possibility of a merger, but it was just two years when the two companies became very close to joining forces.  Rumors are flying. 

It did not make business sense in 2006, but it will in 2008, especially if Northwest Airlines (NWA:NYSE) and Delta Air Lines (DAL:NYSE) merger rumors are true.  Sources close to that deal are whispering about a possible announcement very soon, maybe by the end of this week.  That would certainly explain United's bold attempt at grabbing headlines. Something big is about to happen.

With soaring oil and labor expenses the domestic airline industry is in desperate need of consolidation.  European competition is hotter than ever and multiple small competitors cannot fight nearly as hard as just a handful of large mega-airlines.

Their deal, your steal

As investors, this is a unique opportunity.  In the short term, merger talks will likely be detrimental to share price, giving options players and short sellers some moneymaking opportunities.  But for long-term investors, merger news gives folks a shot at a fantastic entry point. 

The airline industry is highly cyclical. Find a spot to get in on the industry at a discount, and you are almost assured a shot at profits.  This is your opportunity. 

Over the next few days or even weeks, the airline industry will be making headlines.  Each time it does, share prices will move.  Do your homework, study the situation, and invest accordingly. 

Remember: short-term negativity, long-term profit opportunity.  You can make big money in both situations. 

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Posted by Andrew Snyder · Filed Under US Stocks and Markets 

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