Are High-Flying Airline Stocks Cruising for a Fall?

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The airline industry is many things, but one thing it typically isn't is a reliable source of dividends for investors. That seems to be changing, though.

In early May, Delta Air Lines (DAL) surprised the market by announcing it was boosting its distribution by 50 percent to 9 cents a share. The carrier's board also authorized a sweeping $2 billion share buyback plan, to be completed by the end of this year.

Delta's hike was a pleasant move that supported the stock price for the airline. But its shares had already been zooming to record altitude when the dividend hike was announced. The sector has never been a particular favorite of investors, so why -- outside of dividend news like Delta's -- has it been so popular lately?

Extra Miles

The airline industry always has been, and always will be, a challenging place to make a buck. Regulations are stiff, expenses are high, and labor unions are powerful.

In spite of those headwinds, carriers have been doing very well in recent times. Much of this is due to developments around airlines' most burdensome expense: jet fuel.

For the most part, prices for fuel were down on a year-over-year basis in 2013; United Continental (UAL) saw its average price per gallon fall by 15 cents, to $3.12. Considering that the company burned roughly 4 billion gallons of the stuff, it adds up -- in this case, the savings amounted to $600 million.

This greatly helped the company to flip to a net profit in 2013 to the tune of $569 million on revenue of $38.3 billion. In the previous year, it recorded a loss of $723 million on revenue of $37.2 billion.

The same boost to the bottom line has been enjoyed by many carriers, "legacy" and budget operators alike. Aggressive discounter Spirit Airlines (SAVE) saw a net profit jump of 64 percent from fiscal 2012 to 2013. Southwest Airlines' (LUV) increase over that span was even more impressive, at just under 80 percent.

Dividend Tailwinds

So a wave of optimism has spread through the industry, and carriers are feeling flush these days. And Delta wasn't the only company opening its coffers to make a shareholder-pleasing move.

One week after Delta's announcement, Alaska Air Group (ALK) announced a new $650 million stock buyback initiative -- around 10 percent of its current market capitalization, by the way. Meanwhile, the company hiked its dividend by 25 percent this past February, to 25 cents.

In mid-May, Southwest mirrored Delta by lifting its dividend by 50 percent (to 6 cents a share) and authorizing its own share repurchase scheme of up to $1 billion.

Ground Control

The recent happy developments mask a somewhat uncomfortable reality -- the airline business is a cyclical industry, with plenty of bust periods to go along with the booms.

%VIRTUAL-article-sponsoredlinks%Right now, the share prices of many carriers are at or near all-time highs, bringing into question whether those price levels are sustainable. An extreme example is Alaska Air Group, which this past April closed above $95 a share for the first time in its history. This from a stock that never drifted higher than $15 in its first 12 years on the exchange.

Another concern is those fuel prices. Yes, they've stayed relatively low in recent months, but will that last? The International Air Transport Association, the airline industry trade group, recently revised upward its forecast for the price of jet fuel to $108 a barrel for this year, from the previous $104.50.

As a result, the association shaved its expectation for the industry's overall profit for this year by $1 billion, to $18.7 billion.

Turbulence Ahead?

An extra $3.50 a barrel, and the resulting $1 billion decline in profits, spread across the industry's many carriers aren't going to tank the operations of most airlines. But if they result in those companies falling short of the profitability levels the market expects of them, their stocks could very well see a sell-off from disappointed investors.

It follows, of course, that those pleasant dividends might come under fire if profitability is affected badly enough.

The airline industry is flying high for the moment. Investors in the sector should keep an eye on those costs, particularly fuel prices. It'd be wise to watch for any sign of wavering in those far-above-the-cloud-level stock prices, too.

Motley Fool contributor Eric Volkman has no position in any stocks mentioned. Nor does The Motley Fool.

13 Tips for the Best Hotel Rates
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Are High-Flying Airline Stocks Cruising for a Fall?
Before you book a room, call the hotel itself (the specific location, not the chain's 800 number) during business hours to see if the hotel will match or beat rates you've found online. Sometimes they'll throw in extras such as free Wi-Fi, breakfast or late checkout. This gives you maximum flexibility because you usually don't have to pay in advance, plus you won't need to deal with a third party if something goes wrong or you come across a cheaper alternative.  
Some hotels charge a resort fee that may not be included in an online quote. Others charge for Wi-Fi, breakfast or use of the gym. In a city center, parking can cost $35 or more a day. To avoid unpleasant surprises, always ask about which fees are included and how much they'll cost you.
Many small hotels don't want to pay search site commissions and therefore they don't participate. When you call them, you're often talking to an owner or manager who is empowered to offer a discount. TripAdvisor (TRIP) is a good site to use to identify these small hotels, but you should go directly to the hotel to make reservations.
If you're traveling with a family or planning a longer stay, look into renting an apartment or house. You can find listings at HomeAwayFlipKey and VRBO, among other services. Many of these lodgings charge a cleaning fee, so keep that in mind when you're calculating total costs. But with a kitchen you may save on food because you can cook some meals.
On a road trip, pick up the coupon books at rest stops and convenience stores. Those coupons, offered by the owners of individual franchises, often beat the national deals advertised on the chains' websites.
This doesn't work at the height of the tourist season, but often times it will get you the best deal at hotels that start the day with plenty of empty rooms. If you just show up, you can also see the room before you commit. Several apps, including Hotel Tonight, cater to travelers looking for a room on the fly.
If you book with a service that requires payment in advance, read all the fine print. And make sure you know how much it will cost if you have to cancel.
In Europe particularly, tourist offices offer room-finding services for same-day rooms. Even in the United States, some cities, such as Newport, R.I., get a list every morning from local hotels of rooms they want to sell for that night. "Think of this as an old-fashion version of, only a real-life person finds the accommodations that is right for you ... at the right price," says Andrea McHugh, marketing and communications manager of Discover Newport.
Sites such as allow you to find out what other travelers have paid at HotWire and Priceline and can sometimes identify the "mystery" hotels that keep their name and location secret until you book.
Groupon (GRPN), LivingSocial and other deal-of-the-day services offer travel deals, but most of the time you must act quickly to snag one.
If you're traveling to just one destination, look for a deal that includes hotel, airfare and car rental, which may be cheaper than buying these components individually.
Many credit cards offer points equivalent to several nights' hotel stays just for signing up, plus you can earn points when you use your new credit cards. "Using hotel points for free stays is the best deal in the travel industry," says Kevin Barry, who publishes Frugal Mouse, a website about traveling to Disney parks. "Last fall I went on a two-week vacation to Europe. ... One hundred percent of our hotel stays were covered by hotel points, and we stayed at very nice locations."
That means fall in Florida and summer in the Caribbean, winter in Europe, weekends near convention areas and weekdays in resort areas.
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