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Airline Stocks Have Gained Altitude

31 October 2013 in Trading Ideas

It’s not often that we’re able to associate the phrase “hot investing sector” with the airline industry.

In an industry where outperformance – even mere survival – exists on razor-thin margins, many investors are eager to steer clear of these stocks. Not to mention that the financial crisis wasn’t exactly kind to the sector. The NYSE Airline Index fell about 80% in a two-year period ending in early 2009.

Now, however, airlines are hotter than ever.

The airline segment of the On the Road motif has gained 13.8% in the past month, helping the On The Road motif (where airlines have a 31% weighting) to a 6.9% rise in the past 30 days. The S&P 500 is up 3.8% in that time.

Since the motif’s creation in June 2013, it has risen 14.9%. The S&P 500 has increase 8.8% in that same period.

on the road motifSo, what on earth has helped a stock like Delta Air Lines, as CNN Money writer Paul La Monica recently noted, deliver a better performance this year than such names as Facebook, Google and Amazon?1

As La Monica pointed out, consolidation in the industry has been a huge factor. S&P Capital IQ analyst Jim Corridore said that the series of mergers in the industry over the past few years has made the Airlines left standing more efficient and profitable.

What’s more, the major carriers have cut capacity, seemingly making huge price wars to attract consumers a thing of the past. “The airline sector is less risky. It’s more appropriate for investors and not gamblers,” Corridore told CNNMoney. “The companies are managing for profitability, and not market share.”

The improving US economy, if not exactly gangbusters, has also been providing a lift.

As La Monica reported, Cowen analyst Helane Becker wrote in a recent report that she expects strong traffic trends for the whole group to continue. Becker also wrote that she thinks US Air and American will eventually reach a compromise with the government that could allow their merger to go through.

If that happens, it would bring further cuts in capacity and probably keep fare cuts at bay.

While that’s not necessarily great news for consumers, the impact for investors could be even better than a little extra leg room.

1Paul R. La Monica, “Prepare for takeoff! Airline stocks are hot,” CNNMoney.com, Sept. 10, 2013, http://buzz.money.cnn.com/2013/09/10/prepare-for-takeoff-airline-stocks-are-hot/, (accessed Oct. 30, 2013).