Airline Stocks Cruising Upward After Two Turbulent Years

The airline industry, which has broken the hearts of investors for decades, has been on a bit of a roll lately.

Earlier this week, the NYSE Arca Airline Index reached a full-year high, That represents a reversal of fortune from the height of the economic crisis, which sent about a dozen airlines careening into bankruptcy as revenue plunged and oil prices rose. Airlines were vilified for tacking on fees for services that used to be free, including making passengers pay for the privilege of picking their seats. But now, investors see no reason for the good times to end.

Shares of the biggest carriers including American Airlines parent AMR Corp. (AMR), Continental Airlines (CAL), US Airways (LCC) and UAL Corp. (UAUA), parent of United Airlines, are each up more than 200% over the past year. Low-cost carriers Southwest Airlines (LUV) and JetBlue Airways (JBLU) are up a comparably modest 136% and 37% respectively. The reason those stocks are underperforming their peers now, relatively speaking, is that they weren't pounded as badly during the height of the financial turmoil, according to S&P Equity analyst James Corridore.

"The industry went through two very bad years in 2008 and 2009," he said in an interview. "Revenues are starting to improve."

The Wild Cards For 2010: Oil Prices, Labor Disputes

But airlines are hardly minting money. The International Air Transport Association on Thursday slashed its forecast for the global airlines industry's loss in 2010 to $2.8 billion, from a December prediction of $5.6 billion, according to MarketWatch. Demand for airline travel is surging in Asia and Latin America. It is also showing signs of life in the U.S. as well.

Late last year, the National Business Travel Association projected that corporate travel spending would rise in 2010 as companies began to re-open their wallets. That prediction seems to be coming true. Expected increases in leisure travel spending should also benefit airlines such as JetBlue, whose shares have been depressed because investors are concerned about the major renovations going on at its hub at New York's JFK International Airport, Corridore says. He rates JetBlue as a buy.

JetBlue's customers can be fanatical in their devotion to the airline. As part of the celebration of its 10th anniversary, JetBlue offered some one-way fares for as low as $10. The response to the promotion surpassed the carrier's expectations, according to spokesman Mateo Lleras. He declined to be more specific. The company said this week that it would delay taking delivery on some new aircraft to better control growth and costs.

As always, the wild card for airlines remains oil prices: The International Energy Agency raised its forecast for global petroleum demand on Friday because of surging economic activity. Labor unrest also threatens the industry's nascent recovery, according to The Wall Street Journal.

"The industry has a long way to go, and while there are numerous reasons that 2010 might indeed bring better times for the airlines, it is important to remember that "better than 2009 is not saying a whole lot" in the grand scheme," says Air Transport Association chief economist John Heimlich in his 2010 outlook, which he issued in January.