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By Andrew Leckey
The skies are always turbulent for investors in airline stocks, whether due to oil prices, economic trends, fare wars or labor union issues.
Yet 2010 has been the start of something big in terms of financial success, with many airline stocks strong performers. The question is how long surprisingly good times will last.
"The airline industry is in a sweet spot right now," observed Hunter Keay, airline analyst with Stifel Nicolaus in Baltimore. "Business travel has recovered after one of the worst crisis periods the industry has ever suffered, there's been discipline in handling capacity and oil prices have stayed in a tight lower-price band."
Throughout its history, the industry has been cyclical, with a tendency to fall into pricing battles and financing of too many aircraft. For now, it's exhibiting restraint as it copes with a difficult economy.
"Airlines are acting in a much more disciplined manner than they have historically," acknowledged Michael Derchin, airline analyst with
It is a time of consolidation, with the
"There are fewer flights and ticket prices are higher, a pure case of supply and demand," said Basili Alukos, airline analyst with
There are opportunities to invest in airline carriers of varying sizes if you focus on fundamentals and ability to navigate the future.
For example, the stock of the largest U.S. airline is recommended by Derchin and Keay. In fact,
United Continental operates about 5,800 flights daily on six continents and is also a member of
"Only one airline merger in the past 30 years has been a success since there are usually differing priorities between management and labor unions, and it is difficult to integrate the unions at two different airlines," said Keay, noting that United Continental stock is inexpensively priced. "The merger of Delta and Northwest was executed flawlessly in 2008 and 2009, resulting in a new playbook which United Continental would be wise to learn from."
Another investment choice is a smaller carrier that receives a lot of respect on Wall Street.
It also provides service to about 90 destinations on the west coast, Mexico and Canada. This outstanding operator with strong customer satisfaction ratings has upgraded its entire fleet to more fuel-efficient
Besides United Continental, Derchin recommends
"The airline industry unfortunately is structurally flawed over the long run," cautioned Keay, who deems the current discipline is likely to continue through 2011 and into 2012. "It will at some point in the future self-destruct because aircraft is an attractive asset to finance that can lead to insufficient capital."
Because of individual carrier risks and volatility, a basket of hub-and-spoke airlines with strong ties to business travelers is the strategy suggested for investors by Keay. His basket of stocks would include
"Not only do we see major mergers going on in the U.S., but we have global alliances that are almost like mergers," said Derchin, who believes many changes such as downsizing of operations will be long-term. "Governments are allowing airlines to basically collude on setting prices and schedules with antitrust immunity."
In addition to
"I would still agree that airline stocks should be considered trading stocks rather than long-term investments," concluded Alukos. "The difference today is that they do appear to be a little wiser than in the past, even though there will always be wildcards in the airline industry."
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© Andrew Leckey