What the Cost of Oil Might Do to Airline Stocks

Warren Buffett is famously averse to airlines. You can't help but wonder if the cost of oil has something to do with his sentiment. He said that between the first flight at Kitty Hawk and the present day, the net return from money spent on airlines is zero or less than zero.
After a misadventure investing in an airline, he declared himself an "aeroholic" and claimed to have an 800 number he can call so someone will talk him out of buying another airline if he ever gets the urge again.

American Airlines (AMR) recently announced they are reducing flights by 10% or more and plan to retire 75 aircraft. They maintain that the airline industry is not built to withstand the rising cost of oil. AMR stock is off 25% today. Other airline stocks have been hammered.

I don't follow the airlines very much - at one time I took an interest in Southwest Airlines (LUV) and came close to buying it. Their operating philosophy at the time involved hedging most of their fuel exposure, and their financials included figures that took you past the gain/loss on hedging fuel and got you to the actual operating gain/loss. Analysis of today's price action in airline stocks focuses on the extent to which they have hedged their exposure to fuel price increases.

So what do you do now? Hedge your bets or load up on this discount stock? Find out Tom Armistead's plan when you continue reading.

by The Freshman |  05/23/08  |  Stocks: AMR, LUV,