Bulls, Bears and Flying Objects: Time to Buy or Bail?

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My timing is impeccable.

I try to escape and take a few days off and what happens? The market falls apart, both Northwest Airlines

(NWAC)

and Air Canada

(ACNAF)

go on strike, my email box is so full I can't see the bottom, and well, speaking of bottoms, have we seen the bottom of this market meltdown yet? More specifically, what things did we observe within the airline sector the past two days -- and do these bode well or ill for things that fly going forward? Should we buy or bail?

Well, let's see. On Monday, when the

Dow

dropped 512 points, several things happened with the airline sector. First, the most positive thing I noted was that while the Dow lost 6.4% of its value on Monday, the

Dow Transport Index

dropped back 2.7%. I saw this as a good sign.

Secondly, in the midst of this meltdown, what trends did we see in the selloff of the sector? The most obvious one was the age-old speculative- money-in/speculative-money-out movement. While all the major airlines were down on Monday (with the exception of

TWA

(TWA)

, which was flat -- and we ascribe that to the positive news of the airline's pilots ratifying their proposed contract), we had five regional airlines lose double digits in terms of percentage losses on the day.

AirTran

(AAIR)

,

Skywest

(SKYW) - Get Report

,

Mesa

(MESA) - Get Report

,

Reno

(RENO)

and

Frontier

all took it on the chin Monday.

But, again, I saw this as a good sign. If the majors had taken it on the chin to this extent, I would have been worried. No, make that more than worried. But because these five stocks lost the most in terms of percentage losses for the sector, I was not worried. Again, these have all been speculative money pits of late -- so the flight out did not concern me. It made perfect sense.

So, let's look at what happened yesterday.

First, investors moved back big time into the majors, with

Southwest

(LUV) - Get Report

,

UAL's

(UAL) - Get Report

United Airlines

,

America West

(AWA)

,

Delta Air Lines

(DAL) - Get Report

and

AMR's

(AMR)

American Airlines

leading the pack.

While we aren't talking bonds here, that overused cliche "flight to safety" seems to be appropriate here. So this is a good sign.

But in addition, what did we see in some of our speculative money pits? We saw big gains. Frontier, Reno, Mesa, Skywest and AirTran -- those dogs that lost in the double digits the day before -- all sported hefty gains on the day, wiping out most of the previous day's drops.

Chalk up another one on the plus side.

In movements unrelated to this end-of-season stock market roller-coaster ride, we also need to mention that

Midwest Express

(MEH)

took a big 15% bounce up yesterday. Reason? Midwest announced it would honor Air Canada tickets on corresponding routes if the carrier went on strike -- which they did this morning. For you investors in Canadian Airlines, you have seen your shares jump some 34% today as a result of Air Canada's pilots walking out. However, my take on this is that while Canadian will pick up some extra business -- they do not have a lot of extra capacity just sitting around. So, I think that their potential windfall on this is somewhat limited.

In the major flip-flop department, we saw shares of TWA lose 8.5% yesterday. No surprise. Again, I think the only reason TWA held flat on Monday was because of positive sentiment in regard to the pilot contract ratification. And yes, that ratification was very good news for the airline. But hey, 24 hours later, it is old news, and investors once again began to look at TWA in comparison to the rest of the possibles, and in that context, the stock lost ground.

And then there is

US Airways

(U) - Get Report

, which I would say has held exclusive rights to the moniker, "major airline speculative money pit" for the last year or so. If you haven't noticed, this one has done nothing but drop of late, and it dropped again yesterday, losing 7.5%. It also lost 6% on Monday. But today, the stock seems to be holding its own around 54 and change. This is a good sign. It means the big-time speculative money is holding firm for the time being.

Today, as I write this around 2 p.m. CDT, a quick look at today's actions shows that while there does not seem to be as much positive movement as there was yesterday in the sector, volumes look strong. Generally speaking, the sector looks fairly stable, especially the majors.

My two cents' worth on the last couple of days? Overall I have been pleased at the resilence of most of the quality airline stocks and the sector as a whole. Now, this is not to say that the sector has not taken a beating the last two months. Want proof? At the bottom of today's column is a dismal accounting of the damage for the third quarter, through the close last Friday. Things to note?

Great Lakes Aviation

(GLUXC)

,

Frontier

and

CCAir

(CCAR)

were up, based on potential merger/growth news. We've discussed all

three positively in the past months.

And also note that true to form, when the markets get shaky and traders palms start to sweat, Southwest usually outperforms the rest of the majors. This quarter has been no exception. LUV was down 1% on the quarter through last Friday, a far cry from TWA's drop of 36% or American's drop of 32%.

Will airline stocks continue to drop? It depends on what subsector we are talking about. As far as the majors and most of the regionals are concerned, no. The sector is about as low as it is going to go. All the fundamentals behind this part of the industry continue to point in a positive direction. Oil prices are going to continue to be low, domestic traffic levels continue to be high and the current Northwest and Air Canada strikes will feed additional traffic to other airlines. Yes, there is pressure on foreign traffic, but I think this factor may now finally be factored into the price of such stocks as American Airlines.

The biggest damage is obviously being done to the cargo sector and the foreign airlines. And with both of these, I don't know if we have seen the bottom yet. Although it had better get here soon, that's all I have to say.

Would I be a buyer now? Overall, yes, I would.

Holly Hegeman, based in Dallas, pilots the Wing Tips column for TheStreet.com

. At the time of publication she was long Southwest, though positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. You can usually find Hegeman, publisher of PlaneBusiness Banter, buzzing around her airline industry Web site, at

www.planebusiness.com.