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David Tepper’s First-Quarter Airline Purchases Gain 82 Percent Average Year to Date

June 13, 2012 | About:
Holly LaFon

Holly LaFon

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Warren Buffett has an antipathy for airlines. He has said that “The net wealth creation in airlines since Orville Wright has been next to zero” and also called his investment in US Airways in the early 1990s one of his biggest mistakes, after losing the majority of it. David Tepper, master of distressed investing (he made billions during the financial crisis), typically enters a scenario when there is a bankruptcy involved and an opportunity to gain after other people have lost, which was the case with his two big airline purchases of the first quarter: US Airways (LCC) and Delta Airlines (DAL). His uncanny timing led to an average gain of 82 percent on them to date this year.

The bigger winner was US Airways Group (LCC), which has gained 135.1 percent year to date as it pushed to new 52-week highs. Tepper added 7,419,026 shares of the airline in the first quarter at an average of $7.40. He already held 3,238,217 shares, making a total holding of 10,657,243.

The stock’s rally began in late January when the company reported its fourth-quarter results as well as that it had hired M&A advisors to possibly take over AMR, the bankrupt holding company of American Airlines.

In the fourth quarter US Airways made a fourth-quarter net profit of $21 million, compared to a fourth-quarter 2010 net profit of $28 million, mainly due to a 38 percent increase in consolidated fuel prices and partially offset by an approximately 10 percent revenue increase.

The company announced on its fourth-quarter conference call that it had been investigating a takeover of AMR for the three previous months. The first step they had accomplished was winning over three unions that represent 50,000 AMR employees to issue a joint statement in favor of a merger.

On the conference call, Kirby said that a merger of US Airways and American Airlines would “create enormous revenue synergies.” Together, he said, the two companies could generate more revenue than they did individually, as well as save on costs without reducing facility space or management headcount, but by combining IT systems and better purchasing power.

There is no guarantee the deal will go through as of yet, and US Airways has at least two abortive merger attempts in its past. It made an $8 billion offer for much-larger Delta when it went bankrupt in 2006, but the deal never went through. There was another failed merger attempt with United Airlines in 2008, which went on to merge with Continental in 2010. However, Tepper is a bankruptcy specialist and has made a fortune with correct calls in similar situations.

Delta Airlines (DAL)’s also began at the start of 2012, and it has advanced 27 percent year to date. It started off the year announcing GAAP fourth-quarter 2011 net income of $425 million, compared to $19 million in fourth-quarter 2010. Its net income for 2011 was $1.2 billion, excluding special items, as it offset $3 billion higher fuel expenses with higher revenues and its fuel hedging program.

On a longer-term basis, the company’s top line has been improving each year since 2007; it has been generating over $1 billion in free cash flow for the last two years, and positive free cash flow all except one year since 2007.

Reportedly, Delta also had interest in acquiring American Airlines parent AMR Corp. in January, but that has not been confirmed.

Tepper had sold out of his stake in Delta in the fourth quarter of 2011 but had renewed interested soon thereafter. He re-established a position with 6,740,189 shares in the first quarter of 2012 at an average price of $9.80 per share.

In the second quarter, Delta Airlines also took an innovative step in attempting to hedge fuel costs by purchasing its own refinery. It bought a refinery near Pennsylvania from ConocoPhillips in April for $150 million, which would save the company $300 per month on fuel expense.

See David Tepper’s portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of David Tepper.


Rating: 3.5/5 (8 votes)

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