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Outside of technology, the Airline Sector (XAL.X) is the day's best performing group of stocks going into the final hour of trading. The sector is higher by more than 6 percent, trading above the century mark for the first time since September 10. The XAL.X is being carried higher by shares of UAL (NYSE:UAL), in addition to others in the group. Only Southwest (NYSE:LUV) and trades heavy today.

XAL.X Components

UAL's more than 17 percent pop is based on the market's perception that the company's contract proposal will be approved by its mechanics. Several newspaper articles I read over the weekend seemed to indicate as much. UAL's mechanics will meet tomorrow to vote on the proposal and decide whether or not to strike. Obviously a strike would impede upon a recovery in UAL's business following the events of September 11. While an approval of the proposal would further fuel the positive sentiment building in the group.

Several carriers have recently taken steps that portend recovery in the sector. Frontier (NASDAQ:FRNT), a regional carrier based here in Denver, recently increased frequency to Portland and Minneapolis, followed by the addition of new routes to Sacramento and Fort Lauderdale.

Southwest (NYSE:LUV), the nation's seventh largest carrier, reported two weeks ago that it would hire 4,000 new people this year. That amounts to about a 13 percent increase from the company's current employee total. The company did, however, report this morning that its load factor dropped during the month of February due to a decline in traffic and increase in capacity, which explains its under performance. While the news this morning could adversely impact shares over the short-term, I think the fact that the company is expanding bodes well for the stock over the intermediate-term.

In contrast to Southwest's February numbers, Continental (NYSE:CAL) reported last Friday that its load factor rose during the month of February from the year-ago period.

On balance, the developments in the group reinforce what the market has been discounting so far this year. In fact, subscribers to the January Barometer, specifically the best performing sectors during the first month of the year, will be quick to point out that the airlines earned the number five spot this year with their 6.16 percent pop. We pointed out as much in my Ask the Analyst column early in February:

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Since that time, the XAL has gone on to repair more of the damage done following the events of September 11. The group has retraced about 81 percent of its decline since that time and is poised to continue higher this year as the fundamentals of the business improve and the rebound in the economy lifts load factors.

XAL.X - Retracing The Damage Done

The XAL is growing extended and shares of airlines may not offer the best risk versus reward at current levels. That's not to say the group can't or won't work higher from here. It continues to trade very well today. But a technical pullback at retracement and near the 200-dma may be in the offing. Such a retreat would offer those bulls with intermediate- to long-term time frames an excellent opportunity to get in on the recovery that lies ahead.

Eric Utley
Option Investor

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