If you own airline stocks, watch out!

Rarely does a company announce to the market a positive piece of news at 6:49 pm on a Friday. Regional Express Holdings Ltd (ASX: REX) wasn’t about to break that trend last Friday night when it released its ‘profit guidance’.  While profit guidance was the headline used when published on the ASX, the heading on the media release was more to the point – Rex issues profit warning.

The announcement forecast Rex’s profit to now be just 40% of the prior corresponding period’s – implying a profit of approximately $3.6 million. The cause of the decline in earnings according to Rex is that business related travel has plummeted. The release also noted that regional airlines already operate on slimmer margins than their big city peers and that these tough conditions had led to the collapse of two of Australia’s oldest regional carriers (both unlisted) in the past eight months.

At Rex’s Annual General Meeting in November 2013, the company warned that business was significantly deteriorating. With the share price at 90 cents – which is just above its 52-week low – it would appear the market has already priced in a weak result from Rex, however the market is likely to reassess things on Monday morning particularly in light of the following comment by COO Garry Filmer.

“The entire aviation industry is financially haemorrhaging right now and approaching collapse.”

This statement by Mr Filmer should give any investor brave enough to own airline stocks serious pause for thought. The economics of running an airline are tough. It’s why Warren Buffett has warned investors time and again to avoid the industry completely. However it hasn’t stopped brokering house CIMB from liking Qantas Airways Limited (ASX: QAN). According to the Australian Financial Review the broker recently upgraded Qantas from a ‘hold’ to an ‘add’ with a share price target of $1.39. CIMB isn’t so enamoured with Virgin Australia Holdings Ltd (ASX: VAH) however; the broker has a ‘reduce’ recommendation and share price target of 27 cents on the stock.

Foolish takeaway

Knocked down shares can be tempting – and sometimes rightly so. With all three listed airline stocks trading close to their lows, no doubt some investors are being tempted right now. If the fact that Buffett avoids the industry isn’t enough to dissuade you; then make sure you have a good answer to the question as to why the market is wrong and you are right.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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