In January 2003, Wayzata Investment Partners, a $1. 5 billion private equity firm named after the Minneapolis suburb in which it's based...

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In January 2003, Wayzata Investment Partners, a $1.5 billion private equity firm named after the Minneapolis suburb in which it’s based, started buying bonds backed by 13 Airbus SAS planes flown by US Airways Group.

With memories of the Sept. 11, 2001, terrorist attacks in New York and Washington still fresh, Wayzata paid as little as 30 cents on the dollar for the riskiest varieties, or tranches, of the bonds.

In January, the firm exercised its right to buy out the more senior tranches of bonds backed by the planes.

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If US Airways defaults, Wayzata plans to seize the planes and resell them in China, India or the U.S. That may double the firm’s $200 million investment, says partner John McEvoy, 42.

Wayzata is among the resolute investors exploring ways to get a return from the battered U.S. airline industry, which has recorded $30 billion in losses since the terrorist attacks. In addition to buying airline bonds and seizing aircraft, these investors purchase shares of low-cost niche carriers and airline suppliers or put money into start-up companies that provide related new technologies such as live in-flight television.

“In any industry that’s undergoing a profound change, there will be winners and losers,” says Wexford Capital President Joseph Jacobs, whose Greenwich, Conn.-based investment firm owns a controlling stake in commuter carrier Republic Airways Holdings

“Ways to profit”

“If you are able to say, ‘This is where the industry’s going,’ there may be ways to profit,” says Jacobs.

The hunt for profit isn’t an easy one. Even with passenger boardings up 6 percent last year over 2003, U.S. airlines still filled only 77 percent of their seats, according to the Air Transport Association, a Washington-based industry trade group.

This overcapacity, along with the growth of discount carriers, drove average U.S. fares down 5.3 percent to 17-year lows, even as fuel prices surged by a third.

Fifteen airlines in the U.S. and Canada burned through cash at a rate of $24.8 million a day in the fourth quarter of 2004, Goldman Sachs Group airline analyst Glenn Engel says.

Two of the biggest carriers, UAL’s United Airlines and US Airways Group, are reorganizing under Chapter 11 bankruptcy protection, and UAL officials have said the company’s shares are likely to be wiped out.

Minus 41 percent return

Six others — AMR’s American Airlines, Continental Airlines, Delta Air Lines, JetBlue Airways, Northwest Airlines and Southwest Airlines — generated a combined shareholder return of minus 41 percent during the five years ended in October, says airline analyst Zeeshan Memon of Stern Stewart & Co. in New York.

“The airline industry is a very dangerous place to invest: A lot of money has been lost, and you could argue that not a lot of money has been made,” says Bill Franke, former chief executive officer of America West Holdings’ America West Airlines, who remains an investor in the industry.

Dallas-based Southwest has long been the industry’s investment exception, with a market capitalization that is almost double the combined total of the seven other major airlines that aren’t in bankruptcy.

Its low costs, strong balance sheet, profitable expansion in cities such as Philadelphia and success at hedging fuel prices have attracted investors like Joseph Fath, an analyst at T. Rowe Price Group in Baltimore.

9.5 million shares

Fath recommended that his firm buy 9.5 million Southwest shares during the quarter ended on Sept. 30 to become the company’s eighth-largest investor, with 14.3 million shares.

T. Rowe Price, which had $212 billion under management as of Sept. 30, expects the U.S. market share controlled by low-cost airlines such as Southwest to rise to 40 percent by the end of the decade from 25 percent in early January, Fath says.

For the most part, airlines remain the province of investors who specialize in riskier and more complicated investment strategies than simply buying a share of a carrier’s stock, says Mesh Tandon, managing director at Advest, a Chicago-based unit of Axa Financial.

Tandon bought Delta’s 7.7 percent bonds maturing in 2005 when they traded at 50 cents on the dollar in mid-October. He says he sold the bonds in December after they jumped to 92 cents on the dollar when the company narrowly avoided bankruptcy by negotiating $5 billion in labor concessions from its pilots and $1 billion in financing from American Express and General Electric.