.floatimg-left-hort { float:left; } .floatimg-left-caption-hort { float:left; margin-bottom:10px; width:300px; margin-right:10px; clear:left;} .floatimg-left-vert { float:left; margin-top:10px; margin-right:15px; width:200px;} .floatimg-left-caption-vert { float:left; margin-right:10px; margin-bottom:10px; font-size: 12px; width:200px;} .floatimg-right-hort { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 300px;} .floatimg-right-caption-hort { float:left; margin-right:10px; margin-bottom:10px; width: 300px; font-size: 12px; } .floatimg-right-vert { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px;} .floatimg-right-caption-vert { float:left; margin-right:10px; margin-bottom:10px; width: 200px; font-size: 12px; } .floatimgright-sidebar { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px; border-top-style: double; border-top-color: black; border-bottom-style: double; border-bottom-color: black;} .floatimgright-sidebar p { line-height: 115%; text-indent: 10px; } .floatimgright-sidebar h4 { font-variant:small-caps; } .pullquote { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 150px; background: url(http://www.dmbusinessdaily.com/DAILY/editorial/extras/closequote.gif) no-repeat bottom right !important ; line-height: 150%; font-size: 125%; border-top: 1px solid; border-bottom: 1px solid;} .floatvidleft { float:left; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} .floatvidright { float:right; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} Dear Mr. Berko:

Dear K.R.:

I never liked airline stocks, and in 1992 I liked them even less when I was in the company of several snickering senior airline executives and listened to them refer to their load factor (passengers) as “cattle count.” I don’t like the airline stocks because the industry is in the middle of a seemingly inexorable decline in first-class, business-class and commercial ticket sales, which are the most profitable tickets sold.

I don’t like the airlines because I sense that leisure traffic will continue to fall. I don’t like the airlines because customers are fed up with long lines and fees for luggage, toilet usage, soft drinks and aisle seats. Then there are unexplained delays, screaming babies, irrational security demands, narrow seats and grouchy flight attendants.

I don’t like the airlines because carriers like Delta, Continental, American and United have extremely high debt-to-capital ratios between 90 percent and 100 percent. And I don’t like the airlines because, like the automobile industry, their limp management allowed the unions to suck them dry by agreeing to cancerous wage demands and job restrictions.

Suffice it to say that the risky shares of AMR Corp. (AMR – $8.09), American’s parent company, are flying low because debt represents 100 percent of capital. Lower fuel charges and cost cutting have helped offset some of the weak demand and declining revenues. But in addition to all of the above, AMR has two other significant problems: (1) Its unions – AMR’s labor costs are 26 percent higher than those of other legacy carriers – and (2) AMR is strangled by an enormous shortfall in its pension plan that will require well over a billion dollars in cash, not stock, to satisfy participants.

The company is a bloody mess, and AMR’s cost of capital will certainly exceed its returns during the next two to three years. So AMR may have to sell some assets to generate additional capital.

Now, Southwest Airlines Co. (LUV – $11.53) specializes in short hauls, low fares, no frills (they provide soft drinks and snacks) and happy employees, and it carries more passengers then any other carrier in the world. Operating margins are strong, and debt represents 39 percent of capital. New markets (Boston, Minneapolis/St. Paul, and New York’s LaGuardia Airport) should perk up LUV’s revenues and earnings in 2010.

I like LUV; I like its management; I like its balance sheet and income statement; but I do not like the stock. The airline industry is between a rock and a hard place for at least another dozen months.

I know that the best time to buy a stock is when things couldn’t look worse, but I think things could look a lot worse in the airline industry, including a possible bankruptcy by AMR, which is the only way to bring down its labor costs.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. © Copley News Service