Avoid Buying Delta Outright, Straddle This Stock With Options Instead
Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The airline industry as a whole has seen its share of struggles and fought a long battle over seemingly endless hurdles of high fuel prices, impacts from government regulation and security measures, and the slow return of consumers to an industry that once lacked confidence. Last year saw the return of several airlines into profitability and begs the question of whether the airline industry may contain companies worthy of investment looking into 2012.
Delta Airlines (NYSE: DAL) is one of the largest airlines in the United States and boasts an operating fleet of over 900 aircraft with destinations in 67 countries. Will Delta thrive in the coming years or will it struggle against its growing competition in an industry that is just lifting off again?
Delta Airlines earned a position of prominence in 2008 when it merged with Northwest Airlines and is looking like it may finally be ready to move in 2012. I think that much hinges on the results of the airline’s bid on ARM Corp. (AAMRQ.PK), which owns American Airlines, and I’m not ready to take a position until a merger is a reality. Should Delta acquire American Airlines, it will regain its position as the largest airline in the United States — a position that it has traded with United Airlines (NYSE: UAL) since 2008. After Delta’s purchase of Northwest Airlines, United purchased Continental in 2010 and edged Delta back into second place.
I believe that Delta is in a perfect position to finally break the $9 per share barrier that its stock has seen in recent years but I also feel that the airline must do more in order to make the breakaway. Delta is in a much better position than it found itself in at the end of 2008 with a $9 billion net loss and has made a turnaround over two years into profitability. Much of this success has been on the back of Northwest Airlines, which I believe is greatly responsible for the airline’s $600 million profit in 2010. The acquisition of another airline is just what I think Delta needs and if it wins its bid for American Airlines, its stock is going to soar this year.
Delta must hold up against low-cost competition such as Southwest Airlines (NYSE: LUV) and JetBlue Airways (NASDAQ: JBLU) which stand to siphon some of Delta’s business on short range flights. The bigger of these threats is Southwest, which maintains an all-Boeing fleet of 700 aircraft and flies to 110 cities. Southwest threatens Delta and United equally, however, and Delta is able to rely more heavily on international flights while Southwest specializes in much shorter routes.
This year will undoubtedly see an escalation in the standoff between Delta and United in the race to collect and restructure failing airlines in hopes of becoming the largest player on the field. The two airlines have traded blows for three years now and all paths lead to American Airlines now, which is a critical piece in the equation. If Delta closes a deal on AMR, its stock will fly through the remainder of 2012.
US Airways (NYSE: LCC) and TPG Capital are the other contenders in the bidding war and if US Airways wins, then things will go the other way with United and Delta both facing stronger competition. Should Delta lose to US Airways, I expect it will pull back from $9 per share and become the perfect stock to short. Delta stock is either going to take off or take a nosedive this year and this one event will be the determining factor of its direction.
In conclusion, I do not feel confident enough in Delta to take a position in its stock, but I do believe it will make a sharp move in one direction or another. I would go the route of options and straddle this stock with a call and a put and take advantage of its movement in order to pay for the losses you would incur on the losing end of the transaction. If Delta flies, you will profit from your call enough to pay for your losses on your put and still realize a gain. In the event that Delta falls, the inverse is true and you only stand to lose if Delta stays the same, which I don’t see happening in 2012.
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