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Airline Stocks are Favored Right Now, But Should You Buy?

 Airline Stocks are Favored Right Now, But Should You Buy?


Airline stocks are doing something they have not done in a long time - making money for investors. Even contrarian investors wouldn't put their money to work in the airline industry, but that has all changed. Look at these impressive numbers. U.S. Airways (NYSE:LCC) is up more than 121% in the last 52 weeks. In the company's latest earnings report, U.S. Airways reported earnings per share of 26 cents - far above analyst expectations of 19 cents. Excluding special items, that's a year-over-year increase of 384%.

Market insiders say that the 23% rise in just three months is overdone. In fact, it is based on the likely merger between U.S. Airways and American Airlines. A recent agreement between U.S. Airways and the pilots' union representing American Airlines is essentially a stamp of approval on the merger - something U.S. Airways needed to move forward.

SEE: Airline Stocks Look Set To Soar

Delta Air Lines (NYSE:DAL) is up 47% in the last three months. In December, Delta announced that it would buy a non-majority stake in Virgin Atlantic for $360 million. To North American flyers, Virgin Atlantic is largely unknown, but the merger is important to Delta. For one thing, it gives Delta more access to London's Heathrow Airport.

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This not only gives Delta a larger gateway to the European markets, it also provides 31 flights on peak days from the U.K. to North America - something Delta needs to capture more of the international business travel market.

In addition, Delta did something unheard of in the airline business: It is helping to control its fuel costs by purchasing its own refinery. The jury is still out on whether this will be a long-term cost savings, but there's no doubt it is innovative.

SEE: The Industry Handbook: The Airline Industry

United Continental (NYSE:UAL) is the story of an airline which, despite less than great fundamentals, is up nearly 33% in the past three months. United is one of the few North American airlines that has taken delivery of the now-grounded Boeing (NYSE:BA) Dreamliner. United currently has six. All of the $200 million aircraft are currently sitting in hangars pending an FAA and NTSB review of recent fires.

The company's recent earnings report was less than stellar, reporting a $620 million loss and passenger traffic that dropped 3.2%.

Finally, Southwest Airlines (NYSE:LUV) is up nearly 30% over the past three months despite fourth quarter earnings that fell by half versus 2011 numbers. Based on current bookings, the company expects a strong first quarter for 2013. Travelers should be relieved to hear that Southwest CEO Gary Kelly reiterated that the "bags-fly-fee" program would remain.

SEE: A Look At The Airline Industry

What Goes up ...
That's right - must come down. Airlines are flying high thanks to an improving economy, fuel prices that have remained relatively stable, and what the industry calls "rationalization of capacity." This means that anytime you fly, there will almost always be someone in the middle seat.

That's all positive news, but fundamentally not much has changed from the airline stocks that investors avoided not long ago. Many are still unprofitable, and when the next global economic challenge comes, expect the airlines to experience the crush of mean reversion.

If the American Airlines/U.S. Airways merger falls through, be ready for a move that gives most of the American Airlines premium back. Investing based on merger news before the signatures are on the contract can strip much of the profit that comes with merger rumors.

In short, market insiders advise investors not to go all in on airline hype. The stocks may continue higher but the risk/reward of investing new money after such a run is not in the investor's favor.

The Bottom Line
Airline stocks have caught the eye of investors thanks to merger and acquisition activity, an improving economy and a decreasing number of empty seats on all flights. But that does not mean stocks will continue to rise. They've taken off, but at some point they will have to land, and that could be painful for investors trying to capitalize on short-term moves.

At the time of writing, Tim Parker did not own any shares in any company mentioned in this article.

Read more: http://www.investopedia.com/stock-analysis/2013/airline-stocks-are-favored-right-now-but-should-you-buy-lcc-dal-ual-ba-luv0131.aspx#ixzz2JebAHXGH