Airline stocks take off

By Aaron Smith, CNNMoney.com staff writer


NEW YORK (CNNMoney.com) -- Airline stocks rallied Wednesday, riding a wave of investor sentiment that 2010 is shaping into a profitable year for the industry, experts say.

The NYSE airline index was up 1.0% on the day, outperforming the market's modest gains.

The stock for Delta Air Lines (DAL, Fortune 500) jumped 3.8% and US Airways (LCC, Fortune 500) rose 3%. AMR (AMR, Fortune 500), the holding company for American Airlines, was up 2%, while the stock for UAL (UAUA, Fortune 500), holding company for United Airlines, and Continental Airlines (CAL, Fortune 500) surged 4.5% and 5.0%, respectively.

Raymond Neidl, airline consultant, said that stocks were being fueled by an uplift in seasonal travel, a sense that the economy is recovering and the airline industry's ability to maintain capacity constraint and cost controls.

He also said airline stocks are being lifted by "expectations that [airline] losses will be greatly reduced this year, or the industry might even make a small profit."

Bob McAdoo, airline consultant for Avondale Partners, said this sentiment was sparked by this week's reports from Southwest Airlines (LUV, Fortune 500) and United of double-digit increases in passenger revenue per available seat mile for February. He said investors are reading into these "growth numbers" as a sign of better times for the industry going forward.

This follows a report from the Air Transport Association last month that air passenger revenue edged up 1.4% in January, ending a 14-month decline.

The increases in passenger revenue are partly the result of capacity reduction, a cost-cutting measure that the industry has implemented in recent years to make up for rising fuel costs. The airlines hope to save money by cutting their least fuel-efficient flights and by filling up the airplanes.

But Harlan Pratt, a finance professor who studies the airline industry at Northeastern University's College of Business Administration in Boston, said investors shouldn't get too "exuberant" with their expectations for a recovery.

"Maybe some investors are confused and think the halcyon days will return," he said. "They won't. Airlines have scaled back and reduced their flights and the fleets. Despite that, they're just barely eking out profits, if they're lucky."

Now that airlines have scaled back their fleets, they need to scale back their competitors through a merger, he said.

"The best thing that could happen to the airline industry would be consolidation, if you reduce the number of carriers, not just the planes," he said. To top of page

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