Airlines to short

With many commentators noting the big spread between Nymex Crude and Brent, I thought it would be a good opportunity to provide an update on how oil impacts the airlines.

Given that I have a large short position in a number of airlines, I am positioned to benefit from a rising oil price. Even though $WTIC has declined from about $93 in January to about $85 currently, jet fuel

http://noir.bloomberg.com/apps/cbuilder?ticker1=JETINYPR:IND

has risen above its January highs, and is trading very close to its recent high.

Although the price of Nymex crude is more widely quoted in various financial news media, I believe that the jet fuel price is more relevant to the financial performance of the airline sector.

Link to chart:
http://noir.bloomberg.com/apps/cbuilder?ticker1=JETINYPR:IND

Link to quote (and smaller chart):
http://www.bloomberg.com/apps/quote?ticker=JETINYPR:IND
 
Since my last post I have delved a little further into the relationship between the "price of oil" and the jet fuel price, given the decline in $WTIC in February but a rising jet fuel price.

Maybe a better approximation for jet fuel that is widely quoted in the financial news media is the brent oil price.

http://www.barchart.com/commodityfutures/Crude_Oil_Brent_Futures/CBJ11

I also note that the price of heating oil and RBOB Gasoline are also good proxies.

http://www.bloomberg.com/energy/
http://www.bloomberg.com/markets/commodities/futures/

Stockcharts: symbol $HOIL for heating oil (continuous contract).

Jet fuel quote
http://noir.bloomberg.com/apps/quote?ticker=JETINYPR:IND

Jet fuel chart
http://noir.bloomberg.com/apps/cbuilder?ticker1=JETINYPR:IND
 
One useful metric, if you haven't already heard of it, is the Altman Z-score, supposedly the most successful bankruptcy predictor available. Studies measuring the effectiveness of the Z-Score have shown that the model has a 70%-80% reliability.

Of the companies mentioned the scores are as follows in likelihood of bankruptcy.

Likely to go bankrupt within 2 years
znh -0.66
amr 0.12
rjet 0.45
dal 0.62
ual 0.89
lcc 0.97

Risky
jblu 1.38
gol 1.86
alk 2.22
skyw 2.26
luv 2.28

Safe
ryaay 3.62

I use this Altman Z-score calculator. The scores are based on the financial figures alone and there are plenty of other factors which need to be taken into consideration of course.
 
Quote from yabz:

One useful metric, if you haven't already heard of it, is the Altman Z-score, supposedly the most successful bankruptcy predictor available. Studies measuring the effectiveness of the Z-Score have shown that the model has a 70%-80% reliability.

Nice post yabz, have you done any testing or trades based on any of this? It would be a sweet game to get good at. :)
More...
 
I use the Altman Z-score as one of my principal trading tools both on the long as well as the short side. However I wouldn't recommend automatically shorting a stock just because it has a low Z-score.

Also don't use it with Chinese stocks as the balance sheets are too unreliable:eek:

There have been numerous tests of the effectiveness of the Altman Z-score over the years. Morgan Stanley did an interesting study in 2009.
 
Quote from yabz:

One useful metric, if you haven't already heard of it, is the Altman Z-score, supposedly the most successful bankruptcy predictor available. Studies measuring the effectiveness of the Z-Score have shown that the model has a 70%-80% reliability.

I use this Altman Z-score calculator. The scores are based on the financial figures alone and there are plenty of other factors which need to be taken into consideration of course.
More...

Thank you for your feedback Yabz.

You probably know more about the Z-score more than me, but I am guessing that it does not take into account sensitivity to jet fuel prices?

There is a wide range of hedging policies amongst the airlines. Some airlines such as LCC have no hedging at all, whereas others like ALK have most of their budgeted jet fuel expense hedged for the next year or two.

If, for example, jet fuel doubled in the next 6 months, then LCC would be a very weak financial position, and ALK (and other well-hedged airlines) would not suffer as much.
 
Quote from m22au:

You probably know more about the Z-score more than me, but I am guessing that it does not take into account sensitivity to jet fuel prices?
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The Z-score would not take into account sensitivity to jet fuel prices. It is based mainly on the ability of the company to service its debt - debt is the reason most companies go bust ultimately...
 
An update on the airline stocks I am following, in an approximate order of weakest to strongest (over a multi-month / multi-quarter timeframe):

LCC no fuel hedges; will probably suffer the most out of all airlines if oil continues to rise.

GOL has underperformed airline sector in recent months

DAL bad earnings report on 18 January, stock down a lot on that day

Easyjet (EZJ.L): bad update 20 January; stock down over 14% on that day
http://www.bloomberg.com/news/2011-...retax-loss-may-double-on-snow-fuel-costs.html

JBLU
Earnings report on 27 January and was downgraded the next day.

AMR "sell the news" reaction to earnings report on 19 January. Still making losses while other airlines make small profits.

AF.PA (Air France) bad earnings report on 10 February.

LFL didn't react as badly to earnings report (25 January) as others, but has underperformed in recent weeks.

LUV "sell the news" reaction to earnings report on 20 January.

ALGT bad earnings report on 31 January

Hawaiian (HA) bad earnings report 1 February

RJET (stock offering at $7.80 suggests that management thought stock was overvalued at that price)

IAG.L (merger of British Airways and Iberia) earnings report scheduled for 25 February.

UAL Although it moved higher on earnings report 26 January, it was hit hard on 22 and 23 February when oil soared.

CPA Another stock that was looking OK until 22 February.

Ryanair (RYA.L or RYAAY): down in sympathy with EZJ, but has since strengthened.

Stronger stocks:
ALK, SKYW

*********************************

Some other non-US airlines:

CEA
ZNH

TAM (LFL has made a bid for TAM)

LHA.DE

VBA.AX
QAN.AX (very good earnings report 17 February)
 
Quote from m22au:

Since my last post I have delved a little further into the relationship between the "price of oil" and the jet fuel price, given the decline in $WTIC in February but a rising jet fuel price.

Maybe a better approximation for jet fuel that is widely quoted in the financial news media is the brent oil price.

http://www.barchart.com/commodityfutures/Crude_Oil_Brent_Futures/CBJ11

I also note that the price of heating oil and RBOB Gasoline are also good proxies.

http://www.bloomberg.com/energy/
http://www.bloomberg.com/markets/commodities/futures/

Stockcharts: symbol $HOIL for heating oil (continuous contract).

Jet fuel quote
http://noir.bloomberg.com/apps/quote?ticker=JETINYPR:IND

Jet fuel chart
http://noir.bloomberg.com/apps/cbuilder?ticker1=JETINYPR:IND
More...

Hey m22au, how is this trade coming along? Jet Fuel was just above 280 when you first posted this and is now about 325, so I would assume good if you are still holding ailines as a short trade?
 
Quote from beachallstar:

Hey m22au, how is this trade coming along? Jet Fuel was just above 280 when you first posted this and is now about 325, so I would assume good if you are still holding ailines as a short trade?
More...

Yes I'm still short and it's going extremely well.

The main thing is that I am focusing on those airlines with high sensitivity to oil price and/or high debt burden (LCC, AMR, DAL) and avoiding those stronger airlines (eg. ALK) which have lower sensitivity to oil.

Given the share price declines in recent months, airlines could be ready for a short-term bounce. However in the months and years to come, I think they're a good short.
 
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