Irrational Behavior
August 15, 2008 – 10:28 amYesterday, the folks over at Motley Fool today opined on a topic I’ve been thinking about a great deal over the past week: "Why are the Airline Stocks Flying High?"
If you take a look at this chart (click the chart to enlarge) over the past month you will see that the US carrriers’ stock prices have skyrocketed — above 400% for one carrier — since the middle of July. Not surprisingly, this is when oil prices started to decline off the $140 mark.
United is up nearly 270%, US Airways has gained over 400% (not on chart) and American is up over 140%. So, everyone is a winner? Well, not really. The two airlines that actually make money: Southwest and Allegiant have posted the smallest gains. Allegiant isn’t bad at 70%, but Southwest is only up 9% over the past month. Sure, you could argue that Southwest and Allegiant were best prepared for the rise in fuel and, thus, they should benefit least from the drop in price.
But, that argument does not even come close to addressing why United and US Airways should be up over 200%. Southwest may hedge, but it is not completely protected from fuel price. Allegiant doesn’t compete over its network, but it still purchases fuel.
As I’ve noted before, oil should not be the sole valuation tool for airlines. This past month has demonstrated that more than ever.