Airline Stocks Fly Through the Downturn

As for American, investors seem to fear a pilot strike, but even if one is to occur, "it is two years off and it will be short because it will lead quickly to binding arbitration," Derchin believes. And he says Southwest shares could double in three years, due to downsizing by competitors, improved technologies, and differentiation because it charges few fees.

JP Morgan analyst Jamie Baker also says airline shares remain undervalued, with the market failing to recognize that, since the first quarter, "record capacity has been shed, liquidity has strengthened and [annual] ancillary industry revenue has improved by an estimated $3 billion." He too predicts a 2009 industry profit.

In a report this week, Avondale Partners analyst Bob McAdoo said this may be "the first time in history where all carriers are substantially and simultaneously reducing capacity." He said most capacity plans were drawn up for $130 oil, far above its current level, and "most airlines are now positioned to thrive."

Yet the real benefit for investors will come after "a decoupling of share prices from oil prices," McAdoo wrote, because the oil price decline is only the first chapter in the story.

To be sure, history reminds us that since the first flight by the Wright Brothers, the airline industry has failed to turn a profit.

AirTran's Haak notes the projected $7 billion 2008 industry loss would wipe out the profits the industry earned in 2006 and 2007, which followed five consecutive years of losses. "We just had a couple of good years as an industry," he says. "Then we were hit by oil, and then we got a break on oil, and now we have to see how the economy plays out."

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