Some observers believe that the increased demand in flights demonstrates that airline stocks are poised to take off. Others say enough uncertainty exists that investors might be in for a rough landing.
Basili Alukos, who is an equity analyst who covers the airline industry for Morningstar, says Delta (NYSE: DAL; Price: $11.32) has the best prospects for financial success in the industry. He cites its thus-far-successful merger with Northwest. And United Airlines (Nasdaq: UAUA; Price: $22.39), Alukos says, has made significant strides in lowering its costs and has positioned itself for a successful future through the acquisition of Continental, pending regulatory approval. But “a sharp, sustained rise in fuel prices could quickly erode the industry’s fortunes,” Alukos warns.
But David Bickerton, who is a portfolio manager for MDH Investment Management, doesn’t like airline investments. He agrees that many airlines have enjoyed increased demand for leisure and corporate travel, but Bickerton says rising fuel prices and strong labor unions can reduce profits and might cause highly volatile stock prices.
Still, Bickerton adds that investors who have an appetite for the risk of airline stocks might consider Southwest Airlines (NYSE: LUV; Price: $11.87), because the carrier has been successful in hedging fuel prices and has a healthier balance sheet than do its competitors.