Airline Shares Beat the Odds

The airline industry entered 2003 practically dead on arrival, after losing $16 billion over the last two years. But six months into 2003, much has changed for the better.

Airline stocks now have doubled from March lows, oil prices have fallen, the government has kicked in some aid and analysts have become increasingly bullish about recovery hopes. It's a big change from the beginning of the year, when the world's largest airline teetered on the verge of bankruptcy and the No. 2 carrier flirted with total liquidation. At that time, oil prices were rising, demand was slipping and war in Iraq loomed.

So why have the stocks gone up so much, and can the rally last?

Some say that after two years of getting hammered amid nonstop gloom, stocks had nowhere to go but up. "Let's put it this way: Since the end of the Iraq war, there has been no bad news. It seems since Sept. 11, they've had one pounding after another: the war, terrorism fears and SARS," said Ray Neidl, analyst at Blaylock & Partners. "We haven't had that for a couple of months, and that by itself has helped."

American Airlines, a unit of AMR (AMR Quote) and the world's largest carrier, best represents the challenges the industry faced and how simple survival can boost shares. Shares dropped from $7 at the beginning of the year to $1.50 in mid-March, as American careened toward bankruptcy after an ugly fight over wage cuts between labor and management. Short interest skyrocketed and the end seemed near.

Related Stories

Telecom Stocks Traipse Past Wall Street's Worries

Costly Shakeout Still Looms, Energy Watchers Warn

At Dobson, a Death-Defying Rebound

Wondering When Biotech's Happy Hour Will End

Why This Rally Is Different

Wall Street Reinvents Itself

Dynegy, Williams Charge Back From the Brink

Time for Tech's Comeback? Not So Fast

At the same time, a report from the Air Transport Association said the war in Iraq could cause more than $13 billion in losses, potentially wiping out the entire industry if another large-scale terrorist attack were to occur. Even in a slightly rosier scenario that the ATA deemed most likely, the industry would lose $10.7 billion and 70,000 jobs.

Yet the tide turned after AMR management brokered a last-minute deal that included the exit of Chief Executive Don Carty. The war in Iraq lasted 30 days instead of three months, dropping fuel costs and putting industry losses more in line with ATA's best-case estimate of a $6.7 billion loss. Short interest dropped dramatically as AMR shares -- and the rest of the industry -- skyrocketed.

Meanwhile, UAL (UALAQ Quote), the second-largest carrier, wheedled key wage concessions from its unions. Today, the Amex airlines index has nearly doubled from its 2003 low, with AMR close to $9.

"From March 2002 to March 2003, the median airline stock dropped 75%. With the exception of Southwest Airlines, investors were factoring in bankruptcy for nearly all airline stocks," said Glenn Engel, analyst at Goldman Sachs. "In April, a combination of sizable government grants, capacity cuts and a quicker-than-expected rebound in traffic ... caused the stocks to double from mid-April to mid-May."

Cloudy Skies

Whether such gains can continue remains to be seen. The industry has been in a similar situation before, with grim results: In 2002, airline stocks also had rallied, while airline analysts had grown more bullish and the industry had seemed poised for recovery. The problem was that the broader economy didn't recover, business travelers didn't take to the skies and those stock gains vanished.