Chinese Airlines Lead the Second-Quarter Roundup

Not because of the fundamentals, though. Plus, a stock we don't exactly think the World of.
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OK, the second quarter didn't exactly sizzle for major airline stocks. But otherwise, it proved once again that the airline sector can provide good returns to investors.

Showing the best second-quarter performance were two stocks that swept in toward the end of the period and stole the crown from

Frontier Airlines

(FRNT)

.

The stocks in question?

China Southern Airlines

(ZNH) - Get Report

and

China Eastern Airlines

(CEA) - Get Report

. For the quarter, China Southern returned a whopping 141% and China Eastern a bracing 119%.

What's going on in these stocks (American depositary shares, to be precise) has more to do with the rally in the Asian stock markets than with the airlines' fundamentals. In fact, neither airline is anywhere near posting a profit, though China Southern does have a code-sharing agreement with

Delta Air Lines

(DAL) - Get Report

that is assumed to be a "tremendous growth opportunity."

No, the movement in both stocks is strictly a byproduct of the frenzy now gripping the stock market in China. How frenetic is it? Chinese newspapers reported last week that people were pawning their jewelry in order to play the market.

Our recommendation? We wouldn't recommend these for the faint of heart or for the inexperienced trader. As the Chinese markets go, so will these stocks. But if you're in the Asian markets anyway and have a good feel for the moves there, then bingo, you might have found two new toys to play with.

Behind the Chinese twins, we have Frontier, which posted a 63% gain on the quarter. We've beaten the Frontier story to death, and we think its big bounce may have taken a rest for the time being. In the long term, we still like the stock, but we don't see any explosive moves in the coming quarter.

LanChile

(LFL)

posted a 56% gain on the quarter, as the airline continues to restructure itself while the Chilean economy does much the same. Two weeks ago, the airline said

LanPeru

, a new airline that LanChile has a 49% stake in, had been OK'd for takeoff. With this investment, LanChile is banking on taking advantage of major carrier AeroPeru's demise and the resulting chaos in the Peruvian air system.

This one was one of those "how low can it go?" stocks, having hovered around 3 to 4 for a long time. While we see some revenue brightness on the horizon (particularly in the cargo part of the operation), the airline is still sitting on some high cost-per-ASM figures. We're neutral on this one -- because of the country's continued economic woes, the airline's high cost structure and the possibility of perhaps even more competition from U.S. carriers -- i.e., Delta.

Right behind LanChile, we had

World Airways

(WLDA)

. World rose 56% during the quarter, though from a rather low base: its shares closed the quarter at 1 9/16.

So let's talk about this stock for a minute. Does anyone else remember how

Dan Dorfman

would shamelessly tout it on

CNBC

? Sure, that was a while ago, but we still remember it as stellar entertainment. With a relatively small float, this one was easy to move. Still is.

Let's talk fundamentals for just a bit. In World, we have an airline that is barely hanging on. The bulk of its Asian cargo business has fallen apart, and last quarter's results were nothing to write home about. For its latest quarter, the airline reported an operating loss of $2.2 million, which was wider than its $1.5 million operating loss for the year-earlier period, and a net loss of $2.7 million, just narrower than the year-earlier $2.9 million.

The airline has now embarked on an attempt to go after more passenger charter work, which makes no sense to us. If

Atlas Air

(CGO) - Get Report

can pick up more cargo business in Asia, and other cargo carriers are having no problem there, what's the deal with World?

World's attempted move toward passenger operations boosted costs for the past quarter.

Our fundamental take on this airline? Thumbs down. Yes, we know, ex-

Air Canada

(ACNAF)

head Hollis Harris came on board as CEO, and that pushed the stock up some 30% in one day. Well, this move doesn't excite us.

But if you're a daytrader, you have to

love

this stock. Watch it: up 10% one day, down 9% the next, up 12% the next day, down 8% the next. The patterns on this one are fascinating. If you can get in the rhythm of the stock, it could be lots of fun.

But for long-term players, forget it.

We'll talk more next week about winners and losers and what we see for the coming quarter.

Have a great holiday weekend, everyone!

Holly Hegeman, based in Dallas, pilots the Wing Tips column for TheStreet.com. At time of publication, Hegeman held no positions in any securities mentioned in this column, although holdings 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. While she cannot provide investment advice or recommendations, she welcomes your feedback at

hhegeman@planebusiness.com.