Any market led by the airlines and the oils is a sight to behold. Throughout this wacky period where oil and the U.S. dollar are in tight control over the direction of the market, we have seen many industrials fly when oil goes up and the dollar weakens.
But what we haven't had for many months now is a rally in the airlines. It's been my principal fear, because the airlines are a symbol of commerce of all kinds, whether it be discretionary or commercial. The thought had been that as oil goes higher, the margins for airlines shrink -- so therefore, they are truly impacted by the run-up in oil.
I have felt otherwise. We have done a huge amount of work (and soul searching) on this tremendously cheap group. But much to our dismay not as travelers but as stock-pickers, the group's actually been going down because of the same-old, same-old -- price cutting. The price wars that come from adding capacity have hit home even as we all struggle to recall when we didn't hear that we were on "an extremely full flight."
Suddenly, though, there is hope. JetBlue (JBLU) has put through some price increases that look like they're sticking. At the same time, American Airlines (AAL) confirmed that it's going to change its rewards program from one that's miles based to one based on customer spend. That's going to be a lot of income.
At the same time, the dollar's weakening is only going to help the carriers that have big international exposure, namely American, Delta Air Lines (DAL) and United Continental (UAL), while the increase in the price of oil has also helped the beleaguered Texas routes.
Now, these airlines are all trading at historically low price-to-earnings multiples, meaning that investors simply don't trust that the companies can earn anywhere near what the analysts say they can. So when you see an American Airlines or a United Continental trading at 4x earnings or a Delta at 7x earnings, what that says is you are looking at peak earnings and it is all downhill from here.
In fact, when the airlines reported quarterly earnings, the news was all dismal with the exception of the perennially strong Southwest (LUV) -- which, not coincidentally, trades at 11x earnings. The other carriers were all making less per seat mile than had been expected.
But now, with even one fare hike announced by JetBlue, there is a sense that perhaps the market's strong enough to stop the price-cutting and the industry is not adding to capacity as it has been planning. There's always an elaborate game of chicken played with these airlines when they are healthy. They say that they aren't going to add much capacity, then they go and do so to cash in on higher fares -- and then the next thing you know, the price wars have begun.
That's what has happened, and now maybe the tide is turning. It is probably too early to call a turn in the entire group, but I think that it's safe to say that the worst is over. That's fantastic news for the market, given that old timers like me (I never thought I would write that) value the transports as the best sign of the economy's real strength.
Fares have been known to rise and then be rolled back just as fast, which is why I am not saying "go buy JetBlue." I remain committed to recommending Southwest, which has always made money even during vicious price wars. But buying Delta or American no longer seems like you are taking your life in your hands.
It's a good sign for everything, although I don't know if I will ever get over the anomaly of seeing the airlines and the oils in the top-10 gainers in the S&P 500, as they are today.