British Airways (LON:BAY) CEO Willie Walsh says it’s “the worst trading environment the industry has ever faced.”

But crude oil’s retreat from its early-July peak has led investors back into the industry, says Martin Denholm in The Smart Profits Report.

And Martin’s colleague Marc Lichtenfeld has given potential investors two stocks to watch should the uptrend continue. Here’s more from Martin…

If the world’s airlines were on the singles scene, looking for potential mates, many of them would be out of luck.

Having dressed themselves up as best they can, slapped on their best deodorant and after-shave, you can picture them at the end of a night of unsuccessful bar-hopping, looking drunk and desperate.

After all, what do they have to offer? It’s a grim business at the moment, with oil prices having pushed companies to breaking point and fuel prices now sucking up the bulk of annual expenditure.

Take British Airways, for example. The company reported a 90% plunge in its first-quarter profits, as fuel costs soared by 49%. BA projects a meager 3% rise in revenues this year in what CEO Willie Walsh calls “the worst trading environment the industry has ever faced.”

What’s This? A Pleasant Airline Experience?

For all its British charm and tagline as “the world’s favorite airline,” BA hasn’t helped its cause this year, thanks to the PR disaster around the opening of its swanky new Terminal 5 at Heathrow Airport in London.

Computers crashing. Thousands of bags lost. Hundreds of flights delayed or cancelled. The terminal resembled more of a campsite than anything else, as passengers lay around, increasingly not expecting to fly, but hoping to.

I’ve flown BA many times. They’ve always done the job pretty well. But over the past few years, the company’s higher prices (relative to other airlines – and especially in terms of taxes) have put me off.

Still, I chose BA for my recent trip back to Britain – and was impressed. Yes, BA ticket prices rose 7% over the past quarter, due to its fuel surcharge increase. But I nipped in ahead of the most recent hike.

Besides, the height of summer means there’s little difference between airlines’ overall prices. Plus, it was a direct flight from Baltimore, with the best departure and arrival times. Not to mention… free booze! As most other airlines charge for drinks, BA has maintained its free alcohol policy on international flights. And I’m not ashamed to say that I took full advantage! There was also a plentiful and diverse selection of in-flight entertainment. And no charge for checked bags or headsets. We Brits can be a generous bunch!

Consolidation Amid Chaos

It’s transatlantic routes that BA is depending on to generate a sizeable chunk of its revenue, and it seems the airline will take another stab at arranging a mega-alliance with American Airlines.

With the Open Skies transatlantic agreement having increased competition, the current state of the airline industry means that more co-operation is probable. Airlines cannot afford to get into a cost-cutting war with each other at a time when profits are elusive anyway.

Last week, BA detailed plans to merge with Spain’s Iberia, but its proposed alliance with AA (in conjunction with Iberia) will have to satisfy authorities that it doesn’t break antitrust laws. While not an official merger, complete with costs and bureaucracy, it allows airlines to split routes, charge the same prices, and share profits and costs.

Northwest and Delta have already succeeded in this type of deal with Air France-KLM (EPA:AF), but the BA-AA agreement might be harder to push through, as it would create a “dominant mega-power on transatlantic air routes from two of the largest EU members,” according to a spokesman for Virgin Atlantic.

This isn’t a new development for BA and AA. The two firms originally applied for antitrust immunity in 1997 and again in 2001, but BA refused to bow to regulators demands to give up what it thought were too many landing slots at Heathrow.

But with Iberia now on board (pardon the pun), the two hope for a positive outcome. They already have strong links through the One World Alliance and Iberia’s inclusion would give BA and AA a route into the Latin American market, where neither holds a dominant position. In addition, the firms argue that recent consolidation has already strengthened the position of some of its rivals.

And now that the Open Skies agreement has made Heathrow available for other airlines – rather than the previous arrangement, whereby just four transatlantic carriers could fly in there (BA, AA, United and Virgin) – the deal has a better chance of success.

Relief… From Oil

In addition to its transatlantic alliance efforts, BA (and indeed other airlines) is enjoying some much-needed respite from the oil market’s recent decline. With prices having slipped from $147 to around $119 in the space of just a few weeks, my colleague and commodities expert Lee Lowell said in his “Commodities Corner” column yesterday that the next support point could be $107 if the current downtrend continues.

Once upon a time, that price would have caused heart attacks among airline executives, but after this year’s brutal price runup, they’d gladly take it now.

Seems like a drop in oil demand from businesses and consumers alike because of the high price is finally leading to some air being let out of this blown up market. Having fallen for four straight weeks, gasoline prices are down 6% from their peak in July.

And the drop is helping the airlines…

Go Contrarian… It Works

Take a look at this chart…

It’s a yearly chart of the AMEX Airline Index (XAL). Note how the drop in oil prices over the past month has led investors back towards airline stocks.

Back on June 3, my colleague Marc Lichtenfeld highlighted XAL and pointed out that the industry may well be in line for a rebound if it could shrug off its two-year downtrend and form a “basing” pattern. Here’s what he said:

“Keep an eye on the XAL chart. Should the index “base” (stop going down and then flatline), or even reverse the downtrend and head higher, the market is likely signaling a recovery.

“I wouldn’t necessarily get into airline stocks for the long term, as I believe the business model is flawed, but an intermediate-term trade seems quite reasonable once the bleeding stops.”

In the column, Marc gave two airline stocks for potential investors to watch – Alaska Air Group (NYSE: ALK) and Southwest Airlines (NYSE: LUV). Alaska Air has edged down just 2.7%, while the ever-popular Southwest has reaped better rewards, jumping 21%.

And as Marc noted from his own recent flying experiences, flights remain very full – a trend that held true on my Baltimore-London round-trip, too. The depressed dollar and lousy exchange rate certainly didn’t seem to put many folks off a jaunt to England. Not a spare seat to be had. Same story on the way back, too.

Don’t get me wrong… airlines remain in trouble and a return to profitability seems a very long way off for many of them. But if oil prices continue to fall and stabilize, it can only spell good news for this most beleaguered of industries and gives it a chance to get back on its feet. Or, more appropriately, take off.

Source: As Oil Goes Down, Airline Industry Rebounds

Recent high-profile bankruptcies of mainstay American retailers, such as Sharper Image Corp. (SHRPQ) and Linens Holding Co.’s Linens ‘n Things, as well as the proposed mergers between Blockbuster Inc. (BBI)/Circuit City Stores Inc. (CC) and Delta Air Lines Inc. (DAL)/Northwest Airlines Corp. (NWA), and the admissions from the nation’s leading student lenders that their business models are no longer viable, mark the beginning of a long overdue overhaul of the American economy.  In short, the economy will be getting smaller and more expensive.

The success of all of these seemingly disparate sectors depends, to a large extent, on the ability of Americans to continue to borrow cheaply and easily.  Now that home equity extractions and zero-interest credit card rollovers can no longer be used to fund electronics purchases, vacations or tuition, those corresponding sectors are suffering.  The foundation of our bloated service-sector economy, supported by overseas savings and production, is now giving way.

This diminished capacity will result in a wave of bankruptcies and consolidations to restore profitability in what will become a much smaller service sector.  The days of cheap consumer goods from Wal-Mart Stores Inc. (WMT) and cheap airfares from JetBlue Airways Corp. (JBLU) are coming to an end.  It is all part of the process of an unprecedented decline in America’s standard of living, which is the inevitable result of years of living beyond our means.

For retailers, the business model of selling cheap foreign imported goods to over- leveraged Americans was doomed from the start.  It is fitting that just prior to the collapse, Wall Street private equity firms decided to jump aboard a sinking ship (Linens ‘n Things was purchased by Apollo Management LP for $1.3 billion back in 2006).  No doubt the added debt subsequently piled on to the firm by the profit-squeezing buyout boys hastened the company’s demise.  As revenue declines and debt-servicing costs rise for many retailers (who have been similarly hog-tied by private equity firms), look for additional blow-ups down the road.

As the dollar continues its historic decline, imported goods will become too costly for many Americans.  In addition, more of those products still made (or more likely grown) domestically will be exported to wealthier foreign consumers whose appreciated currencies increase their purchasing power.  As a result, fewer products will be available to fill our shelves and those that remain will carry much higher price tags.

In addition, as defaults on both credit cards and store-charge cards continue to increase, the market for such debt soon will disappear. As a result, the credit crunch will spread from subprime mortgages to all forms of consumer credit. 

The bottom line: Not only will Americans be staring at higher prices; they will have to pay in cash. 

Similarly, the looming airline consolidation will usher in a harsher era for the American airline industry.  In truth, given the rising costs of building, flying and servicing aircraft, U.S. carriers currently supply more planes and passenger miles than American consumers can afford to utilize.  While this may seem illogical in a time when domestic flights are usually fully booked, it is important to realize that these crowded planes do not translate into profits at current ticket prices.  While mergers may help the airlines hold down costs for a bit, the only lasting pathway to profit is fewer flights and significantly higher ticket prices.  Of course, this will mean that Americans of modest means will travel less by air. Unfortunately, that fact is simply an inevitable consequence of a sagging currency and diminishing national wealth.

Although many Americans have come to regard affordable air travel as a birthright, from a global perspective it remains the province of the wealthy.  The massive borrowing that has financed the American economy for generations – combined with an evaporating industrial base and a lack of domestic savings – have all combined to reduce America’s wealth in comparison to the rest of the world.  Consequently, as more materials, technicians and jet fuel go to service the burgeoning Asian air travel industry, the higher the costs will become for American travelers.  As with other hallmarks of a diminished standard of living, Americans now have to confront the reality of staying closer to home.

The same mathematics will come into play for our ridiculously expensive higher education system, which cannot exist without a well-lubricated loan infrastructure.  Limit the ability of students to take on heavy loans, and college education becomes untouchable for anyone but the wealthiest Americans.  If loans dry up, universities will be forced to slash their bureaucracies and substantially reduce tuitions.  Ironically, the silver lining here is that with low tuitions students will no longer need the loans that kept tuitions so high in the first place.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and dollar-denominated investments, read Peter Schiff’s new book “Crash Proof: How to Profit from the Coming Economic Collapse.”  Click here to order a copy today.

We start today, Tax Day, with a business opportunity.

The medical industry, says the Institute of Medicine, is grossly ill-equipped for some 75 million soon-to-be elderly baby boomers.

There are only 7,100 doctors certified in geriatrics in the U.S., the institute reported this morning. That’s one doctor for every 2,500 Americans who are already in a geriatric state. When the tsunami of elderly begins crashing over the bulkhead, that ratio is going increase dramatically.

The average doctor specializing in elderly care, despite requiring more training than your average plastic surgeon, makes less than your typical internist.

Our suggestion: Get a license to operate a clinic. Hire some geriatric doctors at an above-market rate. Hang out your shingle. Like zombies from a campy ’50s black-and-white horror film, your customers are on the way.

“How much is $53 trillion?” Sun-li asked. We mentioned briefly yesterday that a South Korean television crew was on their way from Seoul to our offices in Baltimore for an interview. They’d done their homework.

When she asked how much $53 trillion was, she was probing for this specific answer from the book :

“It’s difficult to imagine. A stack of $100 bills would have to be about five feet high to reach $1 million. A $1 billion stack would be one mile high; and a $1 trillion stack would be 1,000 miles high. So $53 trillion would equal 53,000 miles of tightly stacked $100 bills — enough to reach around the world more than twice!”

$53 trillion, of course, is the total amount of unfunded liabilities currently on autopilot in the Federal government’s spending plan. Social Security, Medicare and interest on the federal debt make up the preponderance of those unpaid promises. The tidal wave of retirees we mentioned above isn’t going to make this any easier to deal with… politically or otherwise.

The dollar index has been trading pretty tight at 71 since bouncing off its all-new low last week.

The euro remains a hair short of its recent all-time high, at around $1.58 today. The less stable pound swung a full 2 cents overnight. It shot up to $1.98 then — on word of the biggest monthly U.K. home price decline since 1978 — back down to $1.96 this morning. The yen is “keeping it real” at around 101.

The ubiquitous story in today’s financial news: Delta and Northwest have courted successfully and are now blissfully wed — forming the world’s largest airline. The “new” carrier will keep the name Delta and control some 390 routes, flawlessly maintain 800 airplanes and employ 75,000 cheerful and ever-helpful employees.

Let’s see… last week, we saw Frontier join the bankruptcy ranks of the low-cost carriers ATA, Aloha and Skybus; we witnessed a curious round of passive-aggressive behavior from the FAA, grounding thousands of American flights; and now we’re hearing about the competition-killing merger of two giants. Guess you can kiss cheap tickets goodbye, eh?

On the brighter side, your list of stocks to ignore just got larger… DAL and NWA have become one big stock worth less than the total of their sum.

Adding to the cost of your air travel, jet fuel has reached a new all-time high this week. According to the IATA’s weekly “Jet Fuel Price Monitor,” a barrel now costs $135, up over 5% from last month… up 62% from a year ago.

Ground travel is reaching a price milestone of its own. The average U.S. price of gas hit $3.38 this morning — up a full 10-cents in less than a month. Gas is nearly 20% more expensive than it was at this time last year.

If you’re kickin’ around in an old diesel engine, it gets worse. The national average diesel price is up to $4.12 — a new record of its own. Diesel is up 40% year over year.

Hang on, we’re not done yet. Completing today’s record-high fuel trifecta, oil returned to a new all-time high of $113 — mostly on strength of a weakening dollar.

Agricultural commodities rose yesterday and overnight, as well. Rice found a new record high as we slept, leaping 58 cents, to $21.90.

Wheat surged too, up over $9, on word that Kazakhstan has banned all wheat exports. The former Soviet nation is the world’s sixth largest wheat exporter, grinding out some 8 million tons of the chaff last year alone. Kazakh officials said domestic prices for bread and other wheat products merit the ban.

In Chicago, wheat has nearly doubled in the past 12 months.

Also in Chicago, our favorite biofuel corn rose to $5.97, not far from its all-time high of $6.16. According to the USDA, only 2% of the 2008 corn crop has been planted, about half as much as was in the dirt this time last year.

“All the reports I’m getting are the same,” Kevin Kerr relays to us this morning. “Wet, cold and no equipment rolling.” Kevin’s Farm Tour 2008 is just about getting started. You’ll be among the first to hear what he learns.

Also, for “face to face” advice, check out Kevin on Kudlow last week.

Following Kevin’s Farm Tour last summer, we issued a warning entitled The Great Ethanol Swindle. But hindsight is 20/20, isn’t it? Looks now like we were letting politicians off easy by merely implying they are corrupt.

“When millions of people are going hungry,” India’s finance minister Palaniappan Chidambaram declared at meetings of the IMF and the World Bank held in Washington D.C. over the weekend, “it’s a crime against humanity that food should be diverted to biofuels.” Turkey’s finance minister, relates The Wall Street Journal, said the use of food for biofuels is “appalling.”

“Massive production of biofuels is ‘a crime against humanity’ because of its impact on global food prices,” Gulfnews.com reports a UN official saying on Monday on German radio.

Apparently, “Ethanol: crime against humanity” is the new catchphrase among the international wonk set. Hmmmn… Not sure the Midwest farmers we’ve been hearing from are going to like this one all that much.

The U.S. stock market shrugged off the barrage of bad news from Wachovia yesterday. While financials took a hit, the market at large finished flat. The Dow and S&P lost just a few points, while the Nasdaq slipped 0.6%

Gold hasn’t been all that exciting lately. The precious metal has been bouncing between $900-940 most of this month and trades for $929 as we write.

Two sovereign wealth funds from China and Dubai have joined forces.

Dubai International Capital and the Chinese First Eastern Investment Group announced plans yesterday to launch a fund that will invest in Chinese companies listed on the UAE Exchange. The billion-dollar China Dubai Capital fund will invest mostly in Chinese industries such as infrastructure, resources and health care.

Also on the sovereign wealth front, we learned today that China now owns 1% of BP. China’s SWF China Investment Corp. has quietly amassed a $2 billion stake in the U.K.’s biggest business.

The foreclosure rate in the U.S. continues to rise. It’s up another 5% in March… and now up a steady 57% from last year. According to today’s RealtyTrac, 234,685 U.S. homes got snatched up by foreclosure, and 51,393 of those were repossessed outright… up 129% year over year.

Nevada took the foreclosure prize again in March. One out of every 139 homes in the gambling state was in some form of foreclosure during the month — four times the national average.

Retail sales unexpectedly “rose” in March , reports the Commerce Department. Sales inched up 0.2%, beating the Street’s expectations of a monthly flat line.

But at closer inspection, there’s no sign of a retail revival. The monthly uptick came entirely by virtue of gas station sales, which were up 1.1%. Without such sales, monthly growth would have been nonexistent.

“‘Retail sales’ are a lot different from ‘retail profits,’” Chris Mayer likes to remind us. “Who cares how much discounted garbage you move if you don’t make any money?”

Amen.

Indeed, eight well-known retailers have filed for bankruptcy in the past six months. Many of them took on debt to try to stay afloat, and their inability to pay is sending ripples across the economy. Sharper Image, for example, went belly up with a $6.6 million tab at UPS.

Shopping mall staples like Zales and Foot Locker have also announced hundreds of store closures thanks to dismal sales. Generally speaking, retail store closings are on track for their first nasty year since 2004.

“The reader who surmises that this emerging recession will be different is spot on,” writes another. “What we’re witnessing is the ongoing deindustrialization of America as we have known it. We have lost several manufacturing industries and thousands of jobs that will never return in our lifetimes.

“The mercantilistic, predatory policies of many of our competitors, China most prominently, are slowly draining the economic life force from us, much like leeches draw blood from their victim. It’s an almost invisible process to the untrained eye, but anyone can read about it in monthly newspaper stories that report our trade deficit. That’s the visible score card.

“Unless we deal with the trade deficits and our shrinking manufacturing base, a resolutely nondemocratic, unfair China will dominate. Bottom line: The world’s future — and America’s leadership — are in the balance. Does anyone in government, business, media or education really understand what’s going on? Does anyone care enough to do something about it before our dollar-gorged competitors buy us up during the fire sale at the bottom of a depression?”

“I agree with the USSA guy who is moving to the Andes to try to become self-sufficient,” writes a reader. “My friend moved to the Philippines 17 years ago for the same reason and has invited me to become his neighbor. I am seriously considering it. He is on the beach, where people catch their own food from the sea and raise chickens, pigs, fruits and vegetables.

“He sees food shortages and riots coming to the USSA very soon. Each supermarket holds a three-day supply of food. Once they are empty, city folks will cry out for help to the government — which already has a network of concentration camps built and ready for business. Electricity and water in the cities will be turned off and the people will beg to get INto the nearest camp. At this point, Americans with means will be prevented from the ‘homeland’ uprising.”

The 5 responds: Ian’s just back from a week of surfing in Costa Rica. I don’t know about the whole concentration camp theory you have going, but I’m willing to bet he’d join you in the Philippines in a heartbeat this morning.

Best,

Addison Wiggin
The 5 Min. Forecast

P.S. We spent an hour — on the business end of the camera this time — with the TV crew from South Korea. They’re making a documentary for the largest business network in Korea about the dollar crisis. They’re also interviewing George Soros for the film. Go figure. The interviewer, Sun-li, told me afterward she thought I look like George Clooney.

P.P.S. You’ve got less than 9 hours to check out Byron King’s Energy & Scarcity Investor for the lowest price we’ve ever offered. At midnight tonight, our $500 discount expires… click here to take advantage.

The Atlanta-based Delta bought Northwest for $3.63 billion, all in stock, creating a single carrier with a combined enterprise value of $17.7 billion. The landmark deal is expected to ignite an industry consolidation wave, as small or struggling airlines go for size in order to compete with Delta’s newfound market heft at time when a slowing economy and soaring fuel costs are eviscerating profit margins for marginal players.

“Expect [the] dominoes to fall,” Bear Stearns Cos. Inc. (BSC) analyst Frank Boroch wrote in a note to investors.

Four smaller U.S. airlines have filed for bankruptcy in the past month – Frontier Airlines Holdings Inc. (FRNT), Skybus Airlines, Aloha Airgroup, Inc. and ATA Airlines Inc.

And now that the first major hurdle of Delta’s Northwest acquisition has been cleared, talks between UAL Corp.’s (UAUA) United Airlines and Continental Airlines Inc. (CAL) will elevate in priority.

Since 2001, U.S. carriers have shed more than 150,000 jobs and lost more than $29 billion.

Looking ahead, a report from Calyon Securities predicted the U.S. airline industry would lose more than $1 billion in 2008, mostly from the one-two combo of high fuel costs and shrinking demand, Reuters reported. However, top carriers Delta and Southwest Airlines Co. (LUV) are best positioned to weather the storm, Calyon analyst Ray Neidl said.

The new Delta is expected to generate more than $1 billion annually in revenue, even as it streamlines operations and trims overhead. And its balance sheet will have an expected liquidity of about $7 billion at the close of the deal.

“Today, we’re announcing a transaction that is about addition, not subtraction,” Richard Anderson, Delta’s Chief Executive Officer, said in a statement.

What’s In Store for Investors

Under the transaction’s terms, Northwest shareholders will receive 1.25 Delta shares for each Northwest share they own – a 16.8% premium based on April 14 closing prices.

The merger is subject to the approval of Delta and Northwest shareholders, and must also pass muster with regulators. It is expected that the regulatory review period will be completed later this year.

Board Members, Pilots Shuffled

Delta’s Anderson will be chief executive officer of the combined company. Delta Chairman Daniel A. Carp will become chairman of the new Board of Directors.

Northwest Chairman Roy Bostock will become vice chairman. Ed Bastian will be president and chief financial officer.

The board of directors will be made up of 13 members, seven of whom (including Anderson) will come from Delta’s board, and five of whom will come from Northwest’s board, including Bostock and Doug Steenland, the current Northwest CEO. One director will come from the Air Line Pilots Association (ALPA).

Delta’s 7,000 pilots sealed the agreement by supporting a new labor agreeing that includes an equity stake.

Northwest’s 5,000 pilots will be asked to join a contract before the deal closes, but Reuters reports that they will use “all resources available to aggressively oppose” the deal after the unions could not agree on how to work under one seniority umbrella, a key determinant of shifts, pay scale and what airplanes they fly.