Airline Stocks Flying High

By Investopedia | November 29, 2010 AAA

As we officially enter the holiday season, much of the attention has turned to the retail sector and big names like The Gap (NYSE:GPS), Best Buy (NYSE:BBY) and Apple (Nasdaq:AAPL). However, arguably the hottest industry leading up to the holidays is the airlines. Thanksgiving travel via air was estimated to have increased 3.5% this year and some industry experts are expecting a similar trend through the new year.

IN PICTURES: 8 Easy Ways To Slash Your Holiday Budget

Industry Overview
As a whole, the airline industry has been on fire in the past quarter, as is evident from the Claymore/NYSE Airline ETF (NYSE:FAA), up 33% since the end of summer and this comes after the so-called summer travel season. Over that same span, major players and regionals have both followed suit to big-time returns. AMR Corp (NYSE:AMR), which operates American Airlines, has seen its shares shoot up 44%. While Delta (NYSE:DAL) has followed closely, surging 42%. Investors gave AMR shares a nice bump following the company's latest quarterly earnings report, in which the airline turned a profit for the first time in a long time. Revenues were also strong and management was able to cut expenses and increase gross margin 175 basis points sequentially. Delta saw a similar bump when it reported strong earnings for the same quarter. These strong results came as a surprise to investors and analysts alike and only added fuel to the upward momentum of the industry.

Southwest (NYSE:LUV), Alaska (NYSE:ALK), US Airways (NYSE:LCC) and JetBlue (Nasdaq:JBLU) are all up over 25% in the past 3 months, though Southwest and JetBlue have been less impressive since earnings season. All the carriers, however, reported stronger than anticipated demand for flights, both domestically and abroad. Couple this with aggressive cost-cutting measures, improved capacity management and higher average ticket prices from the previous year, and the formula has been working for the airlines. Probably the biggest factor in their recent success has been the discipline of the airlines when it comes to capacity, electing to limit available seats rather than spreading themselves too thin with too many flights.

Worth Watching
One stock to keep an eye on is the newly formed United Continental (NYSE:UAL), created following the merger of Continental and United. The merger should lead to big cost savings from the synergy of the two carriers, which could allow UAL to beat competitors on price. UAL also offers more seats to China than any other airline, a big advantage when considering the recent influx in business travel.

Bottom Line
The airline industry has been referred to by many as the auto-industry of the skies, and that's not a compliment. But with the airlines finally looking like they've learned their lessons when it comes to seat availability and fleet expansion, perhaps the industry can follow the American automakers into the hearts of investors. (For related reading, take a look at Is That Airline Ready For Lift-Off?)

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