I like the fact that CO is still conservative. for years their uniforms have looked professional, sharp and in tune with classic airline garb. classy dark blue and gold accents. i hate a sloppy-ily dressed airline employee in khakis and a shabby faded polo shirt. its really nice, to me, to be deal with well dressed FA's and airport staff. it just shows professionalism. i think we've all gotten to casual, but hell ive lived in ABQ and MSY for many years. about the most casual as it gets.

in terms of DL and their new interior and IFE. CO has led that pack since the turnaround days. they have the most modern, up to date and consistent AC interiors than any other airline in the US (and id bet the world).

IFE is somewhat lacking and i think they really missed the boat by not immediately copying jetblue, but that will come with time and demand. as of now, CO does not feel their customers are willing to pay for persoanl AVOD or sat TV.

Rather than shorting, I think you'd get much better leverage with puts (LEAPs), once options become available for the new entity. That market cap' figure for Delta seems way too high.

Innovation or makeup on a pig, beauty is in the eye of the beholder.

Typically the big boys suck up all the "easy" money. Be suspisious of something they've "overlooked". I've learned the hard way...

Good Analysis. For what it is worth, I have been very happy with DL's product the past few times I have taken it. I know CO has the "service" thing cornered, but does that make up for TATL 757s and the most restrictive coach legroom in the industry? I'll trade the infamous CO "pizza" for the two-some on the 767 every time.

I'm not saying that DL will get it right, or that they will suceed, or that they are better than CO, but if they DO get it right, they have the size, fleet, hubs, etc. to really hit it out of the park. I just don't think CO has as much upside, and as others have mentioned, investing in airline stocks is like the lottery, so why not go for the one with more potential? CO may be a "safer" bet, but if you want a safe stock I wouldn't be investing in the sector.

Remember that DL is coming out 'fresh' from Ch.11 and has the benefit now of having cut debt in half (net debt will be around $7.5-$8 billion compared to $15 billion or so pre-Ch.11) and the lowest mainline unit cost of all the legacies...hence the initial valuation may not be too off the mark (it's interesting that when the valuation first came out during the US merger attempt, people laughed it off and said it was way over-valued and now it seems that quite a few analysts are jumping on board and saying that the valuation, at least for now, seems appropriate). However, it will be equally (if not more) challenging for DL and NW to continue to maintain the cost advantages they have obtained from Ch.11 going forward.

For now, the financial fundamentals at DL seem to indicate that it is on the right track. For example, CASM (unit cost) at DL is pretty much the lowest amongst the legacies (Q1 Mainline ex-fuel/special items CASM was about 7.06 cents at DL vs. 7.72 for CO, 7.74 for UA, 7.86 for AA, etc.). DL was also one of the few that has indicated that CASM will continue to trend downwards in Q2, whereas AA, CO, UA have all indicated that theirs will increase.
DL has also not reported the flattening of domestic demand (as yet) in Q2 as has been reported by AA, CO, US, and some others, most probably because they have continued to cut domestic capacity.
Another indication is that in the traditionally weak Q1, DL's operating margin was a respectable 3.7% compared to CO's 2.0% or B6/AS/UA's negative margins. WN was at 3.8%, US at 4.2%, and AA was tops at 4.6%.

So overall, at this point in time, DL is starting from a relative clean sheet (as will NW in about a few months when it exits) compared to its competitors so those valuations may not be too overstated. The trick will be to keep that up going forward....

I'm a little bit amazed that other posters aren't making the distinction ijgordon rightly points out above. Who cares what the market value of one stock vs. the other is? Yes, AMR has a market cap of approx $7 billion, but it has an enterprise value of $17 billion. Its equity market cap is low because the debt holders have first claim on the cash flows and assets. Try looking at some relative value measures like P/E or EV/EBITDA -- some of the arguments made here could argue for Delta having a justified higher multiple per dollar of earnings or cash flow than CAL. Simply comparing market caps on an absolute basis makes as much sense as comparing share prices on an absolute basis.

Great advice everyone. I am doing some further research and will keep you posted. Lets see what the new DL stock opens at and what their financials look like.

I am not really trying to beat the market it is more of a hedge. A hedge with (in my opinion) higher probability of making more.

You know airline stocks are near the high end of the cycle when you actually have positive denominators for P/E!

Well, having made a decent living for about a decade mostly by trading airline stocks, I've got to put my two cents in on this one. :)

I'm not sure whether there's an opportunity in CAL here. About a year and a half ago, I bought a lot of CAL right after DAL and NWAC filed Chapter 11. The price: about 11 bucks. I sold about 3 months later in the low $20s. Too soon it turned out: I was afraid that oil would skyrocket to $75 last summer, and that would pummel airline stocks. I was right about oil (which I then shorted), but didn't foresee the amazing increase in unit revenue that kept airline profitable.

But that's OK: the way to make money in airline stocks -- or, for that matter, any stock -- is to only bet when the odds REALLY favor your position. So while CAL may seem a bit underpriced here -- the gloom and doom of the past week seem overdone, given how strong CAL's int'l unit revenue is -- it's not a slam dunk winner.

Now, on the other hand . . . .

I think you have to short DAL when it IPOs next week. It will be like taking candy from a baby. There is no way that company is worth 3X what CAL is. Heck, they weren't even profitable last quarter, when CAL was. There is nothing magical about their business plan. They still have to compete in ATL against AirTran, which still has a better than 20%+ cost advantage on domestic flying. Their NYC int'l business suffers from a much weaker network than CAL, as they lack the connectivity of EWR and have to battle JetBlue domestically there. CVG and SLC are no revenue powerhouses.

The way I see it, if eveything went FANTASTICALLY at DAL -- way beyond our wildest expectations -- the stock MIGHT be worth what it will IPO at. So if you bet against them, about the worst you could possibly do is break even. On the other hand, I think the most likely valuation is HALF of what it will IPO at, which would give you a 50% gain. If things go bad (recession, the usual competition, or God forbid something worse), you could easily notch a 60 or 70% gain. That would happen if -- gasp -- DAL was only valued at what CAL is today.

There is one problem with this strategy, however. It can be extremely difficult -- if not impossible -- to short a newly issued stock. There usually aren't the shares to "borrow." But a little patience could result is a big future payday.

You may be right in your conclusion about shorting DAL, but it's not for the reasons you outlined. I'm really surprised that someone who purports to make a living trading airline stocks wouldn't know the difference between enterprise value and equity value (market cap).

The analogy betwen DAL and CAL would be person C who owns a $500,000 home and has a $250,000 morgage, leaving $250,000 in equity. Person D on the other hand owns a $1,000,000 home and as a $250,000 mortgage, leaving $750,000 in equity. The equity value of Person D's holding is 3 times more, even though the house is only two times bigger than person C's. This doesn't mean that Person D's equity value is "way overvalued." Depends on the business and the amount of debt.

This is the exact same with airlines... you have to look at how much leverage they have, and upon DAL's exit it will have one of the lowest leverage ratios of any airline.

You can talk "enterprise value" all you'd like, but it rarely moves stocks. Earnings per share does. And that's what we're talking about. DAL's lack of them -- certainly it won't have 3X CAL's anytime in the forseeable future.

The only airline stock that, arguably, trades on equity value is Southwest. They're less leveraged than the rest. Everyone else is pretty much in the same boat, so an analysis of equity value (if you can even do it intelligently -- there's plenty of obscure off-balance sheet debt) is of little or no value.

http://www.marketwatch.com/news/stor...C8F1005FC48%7D

The professionals have answered the OP's question: "no."

Well, maybe one (or more) has, but if you were to track airline stock movements vs. the buy recommendations of the analysts for the past 5 years, I think you would find little correlation. The only real way to make money off the analysts is to try to predict when they will upgrade and downgrade, and do it before they announce the move.

I've shorted CAL twice in the past month, both times with positive ($ for me) results. This past Friday was best, with the Morgan downgrades sending everyone, but especially CAL, down.

But I went long before the end of the trading day (I know - never hold cr@p stocks over the weekend, but I couldn't help myself).

---

A famous man was once asked "What's the easiest way to become a millionaire?"

"The easiest way? Start off as a billionaire, then buy an airline."

That man was Richard Branson.

:D