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Polar Vortex Can't Freeze Airline Rally

31 January 2014 in Trading Ideas

Despite the deep-freeze faced intermittently by much of the US this past month, the performance of airline stocks has no doubt heated up the portfolios of many investors.

The Taking Flight motif has gained 7% in the past month. The S&P 500 has lost 2.5% during that same time period. (Since the motif’s creation in April 2013, it has risen 26.7%. The S&P 500 is up 14%).

As Paul R. LaMonica of CNNMoney recently pointed out, some of the recent strong performances by airline stocks seem to defy some otherwise very public missteps.1 JetBlue, for example, is still up 3.2% in the past month, even though it was hammered by customers on how it handled the huge Northeastern snowstorm earlier this month.

However, it’s the recent performance of another airline stock, American Airlines Group, that likely sheds light on one of the reasons for the sector’s liftoff.

Shares of American Airlines, which now incorporate the company’s merger with former rival US Airways, have shot 29% higher in the past month. As airlines – and their investors – have learned, consolidation has delivered a New World Order.

taking flight motifFor now at least, the days of bleeding red ink, price wars and half-empty planes are a thing of the past. As LaMonica put it, the industry is now a “highly profitable oligarchy” after a series of mergers over the past decade in a half that has trimmed the industry roster.

Airlines are now dealing from a position of strength – we’ve evolved to the point where the expectation that Delta will grow earnings by 15% a year over the next few years is seen as relatively uninspiring. By contrast, analysts are forecasting long-term earnings growth rates of more than 40% a year for United and Southwest and more than 60% a year for American.

And because airlines are able to risk customer service snafus by the good fortune of having the ultimate upper hand of “what else are you going to do?” – they’re also in prime position to further juice margins with continuing or raising fees for checked baggage, food and ticket changes.

Still, long-term investors are likely unable to shake the almost inherently dicey nature of investing in airlines, and certainly the double-barrel impact of fuel prices and the economy’s broader outlook is always poised to add turbulence to the sector.

On the other hand, investors looking for any bright spots in the stock markets early performance this year might wonder – “what else are you going to do?”

1Paul R. LaMonica, “Snow can’t stop hot airline stocks,” CNNMoney, Jan. 21, 2014, http://buzz.money.cnn.com/2014/01/21/airline-stocks-soaring/, (accessed Jan. 28, 2014).