Skip to main content

CHARLOTTE, N.C. -- A contrarian airline analyst is forecasting that legacy airline shares could double or triple once oil prices stabilize.

Avondale Partners analyst Bob McAdoo, in a report Wednesday, said there was "little chance" airline shares could rise much with crude oil prices fluctuating between $2 and $4 a day.

"Once oil stabilizes, and it becomes clear to the broad group of investors and pundits that the legacy airlines are not all going out of business, we expect a doubling or tripling in airline share prices," he wrote.

In newly revised estimates for the six legacy carriers, based on recent guidance provided for a Merrill Lynch conference, McAdoo is far more optimistic than handful of other analysts who revised estimates in the past week, although he does forecast a loss in every case.

McAdoo puts the full-year 2008 loss at American Airlines parent

AMR

(AMR)

at $4.88, or 38% below other revised consensus estimates. His estimated 2008 loss for

US Airways

(LCC)

is $6.83, or 39% below others, and his estimated loss at United Airlines parent

UAL

(UAUA)

is $7.48 or 36% below others.

"We readily acknowledge that our estimates are more optimistic than most, but we believe that the analyst community seems to have biases against certain airlines," McAdoo wrote, citing US Airways and United as examples.

TheStreet Recommends

He said the chief shortcoming in many analyst estimates is the failure to assume that revenue per available seat mile will increase as capacity comes out of the market, even though this is exactly what happened when US Airways took out 60 airplanes, or about 15% of its capacity, following the 2005 merger.

To get to the most negative US Airways earnings estimates, "you have to assume that even though they are cutting capacity, revenue growth is no more than 4% through the balance of the year, " McAdoo told

TheStreet.com

.

Meanwhile, American announced Wednesday that it will eliminate five American flights and 37 American Eagle flights from New York's LaGuardia Airport in the fourth quarter.

The Eagle flights, flown with 37-seat aircrafts, serve Boston, Charlotte, Cincinnati, Cleveland, Louisville, Orlando, Pittsburgh and Washington Reagan National. McAdoo said they generate revenue that is below the cost of fuel, not to mention the added costs for crew and other necessities. "Who knows why they were flying them at all?" he asked. "You have to wonder if it wasn't merely to protect the slots."

During the past three decades, McAdoo has spent 12 years as an airline analyst and 12 as an officer at Texas Air Group, People Express and Vanguard.

Although he may be in a minority, McAdoo is not the only analyst to expect improved results at the airlines, a cyclical industry in which the Amex Airline Index hit an all-time low of $16.16 Tuesday. The index rose Wednesday, closing at 17.07.

In a recent report, FTN Midwest Securities analyst Mike Derchin wrote that airline shares "are trading on fears (of bankruptcy) which we feel is highly unlikely given the dramatic structural changes taking place and strong liquidity positions at most airlines. We are net long the group."

Derchin said

Southwest

(LUV) - Get Southwest Airlines Co. Report

is his favorite core airline holding, while American is a favorite "for a trade on oil collapsing due to weaker economic conditions globally."

At the same time, investors should remember that airline shares have historically been a poor investment, representing an opportunity to buy into an industry that has lost about $9 billion since the Wright Brothers first flew and could lose another $10 billion this year.

CreditSights analyst Roger King recommends investors continue to avoid the sector.

"To play a lower oil price scenario, just short the commodity," he wrote recently. "Don't go long airlines and inherit all the idiosyncratic industry issues."