Early in 2007, we bought long-term puts on Southwest Airlines (Ticker: LUV). See previous articles by searching under Southwest. Our rationale:
- LUV was trading at nearly $17.00 a share, with a market cap of $12 billion and the highest PE ratio in the sector of 20x
- The sector was riding on good times back in early 2007, but a recession was obviously not that far ahead, with overcapacity and higher fuel prices
- While LUV has done a good job of hedging fuel prices, jet fuel has tracked oil prices upwards; every 1 cent increase in fuel prices creates an additional expense of $195 million for the industry. According to Bloomberg, jet fuel has increased 62% in the last year alone
- LUV is a relatively unlikely acquisition target for other airlines given that most other players are on the verge of bankruptcy, though it may benefit from other airline failures
In the last week alone, three airlines have filed for bankruptcy including Aloha Airlines, ATA, and most recently, Skybus. Read the full article on Bloomberg, “Skybus Ends Service, Third Airline to Fold This Week.”
