Should Airline Stocks Be Bought?

CHARLOTTE, N.C. -- Last week's increase in oil prices put a scare in the airline industry and raised new questions about buying the shares of publicly traded carriers.

Because share prices in the notoriously cyclical industry have scraped along at the bottom of the cycle since April, some experts sense a buying opportunity. On the other hand, share prices are linked inexorably to oil prices, which have gyrated wildly in recent days.

CreditSights analyst Roger King recommends investors continue to avoid the sector. "To play a lower oil price scenario, just short the commodity," he wrote recently. "Don't go long airlines and inherit all the idiosyncratic industry issues."

Lehman Brothers analyst Gary Chase wrote in a recent research report that "bankruptcy risk is significant" for the entire sector. Still, "for that very reason, however, we believe significant changes must, and ultimately will, happen."

Chase says he sees "plenty of risks to this call," most notably the chance of a sharp spike in oil prices. He wrote the report with oil prices around $125 a barrel.

"What airlines should be doing is betting on the worst," said Joe Leonard, recently retired as chairman of AirTran (AAI Quote), in a recent interview. "That's generally what works out in the airline business."

Leonard says a capacity cut of 15% to 20% is needed, which seems to be where the industry is headed.