With all due respect to the brilliant research minds employed at Goldman Sachs, they may be on the wrong side of an important research call. Roughly a month ago, I noted that their bearish comments about airline stocks looked quite myopic.
These analysts suggested investors sell carriers such as Delta Airlines (NYSE: DAL)
and United Continental (NYSE: UAL)
-- even though shares had already fallen appreciably from their highs -- on fears that the recent phase of industry discipline couldn't last.
Well, the folks who will be making decisions about capacity, financing, and other steps that affect cash flow have recently made clear that Goldman's view is flat wrong. In the past few weeks, Delta's Chief Financial Officer Paul Jacobson bought almost $500,000 in stock, while six different insiders at United (including the CEO, chief operating officer and CFO) acquired more than $2 million in company stock.
These executives have already begun to prove their mettle: despite a still-weak global economy, pricing strategies and cost controls have led to the strongest free cash flow in history.
These moves have come after each stock has swooned more than 20% since mid-July -- which happens to be around the time Goldman Sachs picked up coverage of the view with a dim outlook.
Of course, buying airlines has often been a fool's game, in large part because these firms often carried too much debt and left themselves vulnerable to economic weakness. Yet in recent quarters, these carriers have been applying their prodigious cash flow to steady pay-downs of their long-term debt. Delta, for example, is on track to pay off more than $4 billion in debt from the end of 2010 through the end of 2013.
Falling long-term debt ($billions)
(Note that year-end debt levels for 2012 and 2013 are extrapolated form debt reduction in the first six months of 2012).