Airline Stocks: Making the Connection

Why airlines?

• XAL: NYSE Arca Airline ETF

Yahoo finance

Back to basics

• Airline bankruptcies in recent years• Fundamental challenges

• Fuel prices volatile• Fare wars break out frequently• Capital-intensive• Complicated business model• Mother Nature interference

Confessions of an aeroholic: Warren Buffett

• Warren Buffett is skeptical!• “seriously, the airline business has been

extraordinary… • …It has eaten up capital over the past century

like almost no other business because people seem to keep coming back to it and putting fresh money in.”

• I have an 800 number now that I call if I get the urge to buy an airline stock. I call at 2 in the morning and I say: 'My name is Warren, and I'm an aeroholic.' And then they talk me down.”

Terrible decade: Fuel analysis

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Asian strength

Positive Point

• Worst is over: Passenger revenue up 1.4% in January 2010• ↑ seasonal travel• ↑ financial footing• ↑ capacity constraint & cost controls

• Low cost carriers (LCCs) creating new markets

• Government support for state-owned airlines

China flying high

• Citi 2010 forecast 18% air-travel growth for Chinese airlines• Evidence:14% passenger growth already in first two months

• Momentum to the The Shanghai World Expo:70 million visitors.

• Chinese airlines elevating competitiveness • Balance-sheet restoration• Network optimization • Operating efficiency improvement• Embracing global airline alliances

• State help: Domestic consolidation opportunities • As such, the [mainland Chinese airlines] sector looks

interesting with many positive features," Citigroup analysts Ally Ma and Brian Lam

China Southern Airlines Co Ltd 1055:HKG

• China’s biggest carrier• Outperformed HIS• Balance Sheet:

• Latest price: 3.47 HKD• Market Cap: 6.11bn• P/E (ttm): 7.60• EPS (ttm): 0.457http://finance.yahoo.com/q?s=1055.HK

Financial Times

Opinions on investment

• OK to long winners• 2010: Global outlook –only way is UP

• ↑ seasonal travel• ↑ global economy• ↑ capacity constraint & cost controls

• Caution (or short) for industry as a whole

• Fundamental issues remain