For most of 2009, airline stocks were caught in a holding pattern as the recession-induced slump in air travel pushed most major air carriers into their second consecutive year of losses, straining their cash reserves. However, towards the end of the year, the airline shares took off as investors reacted positively to signs that the industry's fortunes were on the upswing.

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Demand Trend Up
After being in freefall for most of the year, industry traffic numbers for November slipped by only 1%, the smallest decline since June of 2008. Especially encouraging were signs that business/first class travelers, whose numbers had fallen off sharply as corporate travel budgets had been slashed during the recession and who constituted a primary source of revenues and profits for the airlines, were now returning.

Liquidity Issues Improving
Another major positive was the vote of confidence that airlines received from the investment community. Despite having their financial backs to the wall as losses mounted and cash reserves dwindled, the industry still managed to convince the capital markets to provide airlines with more than $8 billion in new capital.

While some of that money will likely go to funding continuing operations, which have become more costly as fuel costs have climbed with the price of oil, some of it went toward the purchase of new planes. In its first major purchase since 2008, United Airlines (Nasdaq:UAUA) spent more than $10 billion buying new jets from Airbus and Boeing (NYSE:BA).

Consolidation Still Not Off The Table
While the improvement in traffic numbers and finances may have taken some of the pressure off, the need for rationalization within the industry remains as strong as ever despite the failure of the Continental (NYSE:CAL) United merger in 2008.

But other options besides merging may now be the preferred route to achieving much needed reductions in operating costs. Delta's (NYSE:DAL) recent moves to lure Japan Airlines away from its partnership with American Airlines (NYSE:AMR) with a $1 billion offer to join its SkyTeam alliance is one such example.

The Bottom Line
While airline stocks have managed to regain some altitude lately, investors should remind themselves that the wildcard for the industry continues to be fuel prices. Should oil prices once again head for the stratosphere as the economic recovery strengthens, then the prospects for this industry will be very quickly brought back down to earth. (For more, see Is That Airline Ready For Lift-Off?)

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Tickers in this Article: DAL, CAL, AMR, UAUA, BA

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