Death to Airlines

Thanks to the friends at JP Morgan, the airlines are dying a thousand small deaths, all at once. JPM downgraded no less than 7 of the sector’s components, including most of the big boys: [[ALK]], [[AMR]], [[LCC]], [[NWA]], [[UAUA]], [[DAL]], [[CAL]].

“J.P. Morgan told investors they should sell on any rally rather than commit more cash because of the uncertainty behind sector consolidation and signs of a recessionary economy.

“While a boon for sentiment, the high-risk uncertainty surrounding 2009 deal closure can’t offset the near-term risk of 2008 losses measured well into the billions,” said analyst Jamie Baker in note.

Baker said that that in prior recessions, demand trends consistently reverse by around 10%, and therefore forecast a 6% to 7% decrease in industry revenue, beginning in the second quarter.

“Airlines have been raising fares to offset higher fuel prices, and were able to do so very successfully through most of 2007,” the credit rating agency said. “However, we expect that this trend will stall across the industry in the face of softer demand, likely first on domestic routes and then in international markets.” (source)

I had been watching ALK for technical reasons. It’s been hovering at resistance/support and was considering going in for a trade.

Saw the downgrade this morning along with a surprising non-reaction to it in the pre-market. With oil making new all-time highs every other day, undecided technical direction, and a fresh batch of downgrades, it stock was ripe for some speculation. Bought a basketful of March 20. Puts at the open, which are now up over 200%. Boo-yah!