It's amazing how sometimes investors can get so fixated on one thing that they miss the important things. This time, it was the airlines.

IN PICTURES: Top 8 Estate Planning Mistakes

Between the ash cloud intermittently shutting down Europe's airways and the buzz about the merger between Continental Airlines (NYSE:CAL) and UAL Corp. (Nasdaq:UAUA) subsidiary United Airlines - and the impact it may have on Delta Air Lines (NYSE:DAL) - two key points were lost in the shuffle.

Major Airline Uncertainty
The current-year forecasts look amazing, with single-digit P/E ratios on the menu for Delta, United and Continental. If the anticipated numbers are on target, then airline stocks really are the market's best bets right now. But, that's a big "if".

Don't get me wrong. The stats confirm that airline traffic is getting better; the Air Transport Association announced a 12.5% increase in passenger fares for April - the fourth monthly increase in a row. But will that actually lead airlines to the stunning earnings analysts are expecting? That's where I have my doubts.

Just for perspective, UAL Corp. is expected to earn $3.83 per share, significantly more than the losses it experienced previously. In 2009, UAL had a loss in earnings per share of 7.71. And although the last two quarters have shown a remarkable turnaround, consistency in the figures is contingent on ongoing market prosperity.

Delta's aggressive thinking is on the revenue front. Analysts are expecting a 12% increase in revenues in 2010 to lead the company from last year's per-share loss of $1.29 to a gain of $1.70 in 2010.

Costs have been cut to the bare-bone minimum, and passenger count increases aren't just a myth. The enthusiastic numbers, however, just don't quite seem to jive when it comes to believability. With the correction in the market, estimates in all industries might have to be readjusted.

Disasters? No. Recipe for disappointment? Yes. There is some good news from the airline industry though.

Regionals Aren't Winning
You own a stock for where it's going - not for where it's been. From that perspective, the major airlines are back to looking attractive. At the same time though, if a company is already "there" in terms of profitability, then comparative risks are like night and day. And many of the regional airlines appear to be in just that situation.

While it wouldn't be accurate to say they all survived the recession with flying colors, it would also be inaccurate to say there's not a noticeable fundamental difference between Delta, United and Continental, and say SkyWest (Nasdaq:SKYW), Alaska Air (NYSE:ALK) and AirTran Holding (NYSE:AAI). Each of those smaller airlines - like their bigger brothers - is also carrying small P/E ratios for 2010. The only difference is that those three airlines were profitable through the 2009 downturn.

The Bottom Line
If you're looking to make a play on the revival of air travel, the smaller fish in the sea have proven they can turn a profit even when things are tough - just think how they'd do when times are decent. (Break through the clouds to see if these stocks will rocket higher, or crash and burn. For further reading see Is That Airline Ready For Lift-Off?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  4. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  5. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  6. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  7. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  8. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  9. Stock Analysis

    The Safest Stocks You Can Invest in Right Now

    These stocks are likely to hold up better than others in a bear market, but there's a twist.
  10. Investing Basics

    5 Reasons to Expect Lower Stock Returns

    Lower stock returns are likely here to stay for some time. Here are five reasons why.
RELATED TERMS
  1. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  2. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  3. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  4. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  5. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  6. Impact investing

RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!