About Owning Airline Stocks

Owning airline stocks is not always the best investment strategy. Many factors outside the control of the airline directly effect the airline's bottom line. Well organized unions, unstable fuel prices and brutal price competition all make it difficult for an airline to maintain profitability. Frequent airline bankruptcies over the past two decades seem to underscore this fact. Though some low-cost, no-frills carriers have been successful, the major airlines have suffered losses in recent years. Overall, airline stocks dropped 27 percent from 2005 to 2008.

History

The Wright Brothers could have never imagined what they were starting on that cold December day in Kitty Hawk, N.C. By the mid-20th century, air travel was becoming more and more common, and the airline was born. The two largest pioneers were Pan Am (Pan American World Airways founded in 1927) and TWA (Trans World Airlines founded in 1930). United Airlines (founded in 1926), American Airlines (founded in 1930) and Continental Airlines (founded in 1934) also got their start around the same time.
Things were good for the airlines, generally speaking, until the mid-1970s during the oil embargo. From that point on, even though hundreds of new routes opened up around the world, excessive government regulation, crippling strikes from the various unions and spiraling costs drove many airlines out of business and gave the industry a reputation to be avoided in investment circles.

Identification

The top 10 airline stocks (by market cap) traded in the U.S. and their symbols are Ryanair (NASDAQ:RYAAY), Southwest Airlines (NYSE:LUV), Lan Airlines (NYSE:LFL), Delta Airlines (NYSE:DAL), American Airlines (NYSE:AMR), Continental Airlines (NYSE:CAL), Jet Blue Airways (NASDAQ:JBLU), TAM (NYSE:TAM), United Airlines (NYSE:UAL) and Copa Airlines (NYSE:CPA). Ryanair, Lan Airlines and TAM are foreign carriers traded through ADRs (American Depository Receipts).

Considerations

Even though airline stocks have underperformed in recent years, many are near their all-time lows and might represent a good value. With the prevalence of globalization, air travel is a necessity in the 21st century and some airlines have found a formula for profitability. The success of low-cost, minimal service Ryanair is a prime example. Founded in 1985, Ryanair is now the largest airline in the world.

Potential

The greatest potential in airline stocks today seems to be with the low-cost, no frills carriers. Airlines are making a concerted effort to make air travel more individualized (and thus more profitable) by moving toward a la carte pricing. By offering bare-bones pricing on an economy class seat and then charging upgrade fees to select a window or aisle seat, for each piece of checked luggage, and for a variety of other services the airlines seem determined to return to consistent profitability. Whether or not the new pricing structure is successful remains to be seen.

Expert Insight

Exchange traded stock options are available on most airlines, and they represent an excellent opportunity to take advantage of price swings without actually owning the stock. While options are a sophisticated investment and only seasoned investors should participate in them, they offer excellent leverage on the airlines, especially to the downside. If an investor believes the price of an airline's stock is going to go lower due to poor management, quarterly losses or a recent mishap, buying put options can be a much more cost effective trading strategy than shorting the stock itself.

Resources

• Airline sector finance info