Old article, but if you don't know about PAR Capital, below is a brief primer. They are the travel sector investment specialists and hold for multiyear, multibaggers buying at value prices. They are UTA's largest institutional investor (5% of company) and also call PCLN their largest holding in their $2 billion fund. They are also the second largest holder of Orbitz, third largest holder in United, and largest holder of Dollar Thrifty. UTA is their only China based travel pick in their portfolio.
Hedge Fund Has No Fear of Flying
Bull Market Report
Published 12/12/07
Value-focused hedge fund PAR Capital has been in business since 1990, and it has made a name for itself gaming the airline industry, correctly calling tops and bottoms to cycles for the past decade. At one point in mid-2006, PAR's portfolio was valued at $1.86 billion and half of its investments were in airline stocks.
The Boston-based firm's success investing in the airline business is not surprising. Founder Paul Reeder and portfolio manager Edward Shapiro are both former airline analysts. Robert Crandall, the retired CEO of AMR Corp. (AMR, $16.63, -1.18) is an investor. He had high praise for the pair earlier this year after PAR dumped airline stocks in late 2006 as the AMEX Airline Index (^XAL, 36.87, -1.73) ran to a three-year high.
"Shapiro and Reeder have done a hell of a job," Crandall told Bloomberg, saying that PAR posted an almost 30% gain before fees in 2006. "When you have smart people who are running money and have their own skin in the game, that is a good omen."
The firm has a long history of making good bets on the airline sector. In 2005, it helped to finance US Airways Group (LCC, $15.31, -2.28) as it exited from bankruptcy and merged with America West. PAR eventually invested a total of $265 million in US Airways, and a little more than two years later, it had cashed out of most of its holdings in the company for an almost 240% gain.
An examination of the PAR's most-recent quarterly filing by our colleagues at InsiderScore revealed that PAR was once again building up positions in airline stocks. At the end of the third quarter of 2007, PAR's U.S.-listed equity portfolio was valued at more than $1.54 billion, and the firm had increased its stakes in Northwest Airlines (NWA, $16.20, -1.51) and Allegiant Travel (ALGT, $32.86, -0.73), and took positions in AMR, Continental Airlines (CAL, $24.23, -2.55), AirTran Holdings (AAI, $8.05, -0.12), JetBlue Airways (JBLU, $6.25, -0.41), and Delta Air Lines (DAL, $15.74, -1.29).
Not surprisingly, the AMEX Airline Index had fallen -25% during the first nine months of 2007, including a -12% drop during the third quarter. The airline benchmark has shed another -20% since the end of the quarter.
The industry does face challenges. As even the most casual observer knows, fuel makes up a big part of the cost of running an airline, and oil prices are still near all-time highs. While the airlines use sophisticated hedges, record high oil prices will catch up with the firms eventually.
Another concern is that a slowing U.S. economy will impact air-passenger miles. The industry as a whole has been profitable since the second quarter of 2006, according to the Air Transport Association, but the combined headwinds of rising oil prices and a slowing economy will likely result in the airlines losing money in the current quarter.
Several big airlines said last week they were pulling back on capacity growth as a result to the twin headwinds. The move is designed to head off an overcapacity of seats; for the past mostly profitable year, the domestic carriers have been flying fully loaded planes around the country, which is the most profitable state in which for them to operate.
"We are concerned about growing evidence of slowing economic growth that would inevitably affect passenger demand, coupled with a surge in energy prices," said Gary Kelly, CEO of Southwest Airlines (LUV, $13.32, -0.28), in a statement last week.
It should be noted that PAR Capital doesn't just buy airline stocks, but it is very travel-industry focused. Its largest position at the end of 3Q07 was an outsized holding (14.6% of its portfolio) in Priceline.com (PCLN, $111.91, 1.67). We discussed Priceline.com as part of a look at e-travel sites in July, noting that the company was "considered to have a bright future as a push into overseas markets is starting to pay dividends." We liked the stock, but suggested looking for a dip; it happened not long after we posted our comment, as the stock slipped to the low $60s by early August. Since then, it's been up, up, and away for Priceline.
PAR Capital took advantage of the rise to book some profits during the quarter, but it has been an investor in the company for more than four years and has obviously kept a large position. PAR's second-largest holding is a modest stake in Google (GOOG, $699.35, 0.15), and the firm took a small stake in Priceline rival Orbitz Worldwide (OWW, $8.70, 0.14), which IPO'd in the third quarter of 2007. We examined the Orbitz IPO in August and were skeptical. Orbitz managed to rally in the late summer, but resumed slipping again by fall. The stock has lost more than -20% of its value since we profiled it.
PAR Capital clearly sees something that others don't, so are there opportunities here? We have to admit we find it difficult to identify a winner since we tend to be long-term oriented investors. The fundamentals of the airline business are very lumpy and conditions can turn lousy very quickly. It is a capital and labor-intensive business whose principal product -– a seat ticket -– is a commodity. Buyers shop almost exclusively on price. Once a lower-cost carrier drops its fares, the higher-cost competitors have no choice but to match a price cut or lose market share.
It's tempting to try to follow a smart sector player like PAR, but picking winners is tough. Unfortunately, or maybe fortunately, there isn't an airline sector ETF to use as a proxy for what PAR is doing. The closest thing is the iShares Dow Jones Transportation Average Index (IYT, $84.74, 0.31). Its airline exposure is actually pretty slim; it is more focused on railroads and shipping companies like FedEx (FDX, $97.97, 0.30).
If you were tempted to take a plunge, we'd look at a lower-cost carrier like a JetBlue over a legacy carrier like AMR. One might also look at a carrier like Delta that has cut costs through the bankruptcy process. Bear in mind that if you pick a carrier that fumbles the business again and heads to bankruptcy court for protection, you could lose your entire investment. We're not huge fans of the airline sector, but given PAR's impressive track record, we thought some subscribers may be able to put this information to good use.
