3 Lessons for Transportation Industry Investors Following Airline Bankruptcy
Investing is about balancing risk and reward. Bankruptcy of Aviation it is yet another example of an investment risk that did not provide any reward at all. There are important lessons for investors watching an airline’s financial decline, especially if you’ve lost money along the way. Here are three that you should focus on.
1. Bankruptcy is a bad sign
It is no joke to say that bankruptcy is a bad thing. Generally, a company must seek court protection because it has financial problems. Often, the problem is too much debt coupled with weak income and income. This, in fact, is what led the Spirit to collapse in the first place.
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While bankruptcy can help companies reduce spending and cut costs, it doesn’t mean the business’s problems are solved. Buying a stock that has just come out of bankruptcy is a very risky investment decision. Only aggressive investors should consider this move. It is not uncommon for companies to go from Chapter 11 bankruptcy to Chapter 22, as Moya did.
That’s the joke of the financial industry, Chapter 22 represents a second bankruptcy. However, the point is that most investors should watch from the sidelines until the company has proven that it has turned around before buying it as it emerges from bankruptcy. Wind is just the latest example of the dangers that come with bankrupt companies.
2. It’s bad when a struggling company’s unity falls apart
JetBlue (NASDAQ: JBLU) had agreed to buy Spirit, but the deal was effectively overturned by regulators. That merger was like throwing Spirit a Hail Mary pass, as the airline looked for some redemption from shareholders. When that deal fell through, the risk profile of investing in Spirit rose significantly.
That it eventually ended up in bankruptcy court is not surprising at all. In fact, the same thing happened Robot after its agreement Amazon (NASDAQ: AMZN) it split in half. You should tread very carefully when you see a Hail Mary pass by any struggling company.
3. Leverage is a business killer
One of the main factors that led to Spirit’s bankruptcy was the high prices of jet fuel, a result of the international conflict in the Middle East. However, the real issue was power. The level of the company’s debt has left it with little room to handle the situation in the face of difficulties. That’s not uncommon in bankruptcy cases, but such risks are often well known before bankruptcy.
In particular, in transportation stocks, investors need to pay close attention to balance sheets. This is because the assets needed to run a transportation business, such as an airline, are very expensive. If you own an airline stock, you should double-check its strength, ability to cover interest costs, and get a sense of the size of the near-term maturity. Some industry observers suggest that both JetBlue and Frontier Group (NASDAQ: ULCC) face a higher risk of bankruptcy. (In retrospect, it might be a good thing JetBlue didn’t buy Spirit.)
In other words, don’t think Spirit Airlines is the only airline to be thrown into bankruptcy. Rising fuel costs may raise other airlines, too.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Amazon. The Motley Fool has a policy of disclosure.
3 Lessons for Transportation Industry Investors Following the Airline Bankruptcy was originally published by The Motley Fool.
