Editor's Note: Jon D. Markman writes a weekly column for CNBC on MSN Money that is republished here on TheStreet.com.

Is there anything worse than air travel these days? Combine long lines, no meals, pitiful snacks, surly attendants, cramped seats, high prices, lousy movies and overbooked flights with bad weather and a smelly, overweight seatmate, and you've got just about the worst nightmare an already stressed-out business person can ever face.

And yet the airline industry -- which no one likes, and which has been the single worst investment in the stock market for decades -- has surprisingly been by far the single best performer in the stock market over the past six months. It may have quite a long way to run still. So much for the old adage about how you should invest in what you like.

The easy explanation for this paradox is that crude oil prices have dropped 35% since Aug. 1. Since jet fuel is one of the largest costs for the airline industry, surely airlines' earnings strength must simply be proportionate to the decline in expenses.

But easy explanations are seldom sufficient. You know that the decline in fuel costs can't be the whole story, because an index tracking major airlines -- such as AMR Corp. ( AMR), which operates American Airlines -- is up 65% since Aug. 1, or almost double the decline in oil prices.

For that matter, AMR and UAL ( UAUA), which operates United Airlines, are themselves each up about 95% in the past six months -- tripling the return of more lavishly praised companies such as Google ( GOOG) and Apple ( AAPL). Something else must be at work.

The answer, in part, is that Wall Street in recent years has tended to most reward companies from which the least is expected. And very, very little is expected from airlines.

Buffett's Folly

Last year, according to a new study published by Birinyi Associates, the single best strategy that you could have pursued would have been to buy all companies at the start of the year with the lowest projected five-year growth rates. Weird, but true. An example was AMR, which analysts expected to grow just 6% annually over the next five years. Its shares were up 36% in 2006.

Contrast that with eBay ( EBAY), which analysts expect to grow a robust 25% annually over the next five years. Its shares were down 30% in 2006.

So the remarkable thing about airlines last year, which is still in force today, is that so little is expected of them from bitter consumers and long-abused shareholders that any good news at all is cause for celebration.

How bad have airlines been as an investment over the years? The Dow Jones Industrial Average is up almost 870% since 1985. The major airlines are up just 160% over the same span. Since 1995, the Dow is up 225%, while the airlines are up just 25%.

Even Warren Buffett ran into trouble investing in airlines. He tried to make a value call on US Airways, which was then known as USAir, in the 1990s, and imperiled as much as $350 million in shareholder money when it went bankrupt before ultimately hanging on and emerging with a slight profit. He reworked an old joke when issuing a mea culpa to his Berkshire Hathaway ( BRK.A) investors over the fiasco:

"When Richard Branson, the wealthy owner of Virgin Atlantic Airways, was asked how to become a millionaire, he had a quick answer: There's really nothing to it. Start as a billionaire and then buy an airline."

What's different now? Consolidation is a big part of it. Mergers have taken hundreds of planes off routes, making remaining seats more valuable. Yes, the fact that flights are more crowded and harder to find is what's making the industry more profitable. Throw in more-rational pricing, falling debt levels, short-covering and that whopping energy-cost decline, and you have everything required for a sustainable bull market. These stocks are going places.

Friendly Stocks

To be sure, much of the secret sauce in airlines' success does stem from the energy rout. More precisely, it's a phenomenon that the investment community calls "operating leverage." That is the benefit a company receives from small changes to costs that are presumed to be fixed.

Investors' profit-and-loss estimates for airlines going into 2006 were predicated on high fuel costs, for example. The change in those costs has been so extreme that they've had a disproportionate effect on earnings. They act as a lever propelling profits much higher than you might expect, just like a small person can send a large person flying if the two are seated at opposite ends of a teeter-totter.

Since the airline story is still misunderstood and underappreciated, despite the companies' big run, I think you should consider adding one or two to your portfolio. I know it's hard to believe, but these companies are still really cheap, and even if crude oil prices move higher by as much as $10 to $15, they will make a lot of money.

Outside of energy prices, a key factor is that bankruptcies and near bankruptcies in the industry have kept out new competitors and prevented healthier companies from expanding. That has tightened "seat supply," as the industry calls it, with available space up just 3% in the past year. Demand for those seats has been relatively robust as the economy chugs along, particularly from business travelers, so pricing has been favorable, too. The major carriers attempted a price increase of $5 on domestic one-way trips over the weekend, and though it failed in a spurt of opportunistic competition by Monday, it was at least a sign that airlines are feeling confident and acting spunky.

A 540% Earnings Jump

Where to start? Might as well book some United Airlines, which reported slightly disappointing earnings this week but provided optimistic guidance. It runs 3,600 flights a day to 200 destinations and could earn as much as $5.75 per share in 2007, which would be up almost 540% from the 90 cents it earned in 2006. It could then report $6.75 in 2008, which would be another 18% spurt.

Yet UAL stock is trading at just 7 times those estimates, which makes it a screamin' deal. It's like the homebuilders in 2004. They had doubled from 2003, but they were so cheap that they were easy to buy, and indeed many went on to triple over the next two years as the business fundamentals peaked. My target for UAL next year is $75, up a bunch from its current perch at $47.50.

American Airlines looks good too, which is hard to believe if you remember its bankruptcy fight of a few years back. It recently reported a fourth-quarter profit of 7 cents, which beat estimates that it would lose as much as 8 cents. Cash flow was strong, and it ended the quarter with $4.7 billion in the bank.

With a quarter of its fuel costs hedged for prices as high as $66, and a plan to pay down debt through a secondary stock issuance, I think it can earn as much as $5.25 per share in 2007 and $6.75 in 2008, meaning its forward price multiples are likewise around seven times earnings. If you think rising optimism about the airline industry can boost multiples closer to the 10-times area they've hit in the past, then the stock can move toward $67, up 65% from the current quote.

Among the smaller airlines, consider Alaska Air Group ( ALK), which enjoys a powerful competitive advantage in its West Coast niche. It will certainly come to earn a merger-candidate premium, as it would be a tasty snack for one of the majors. In a more optimistic climate, the stock can trade at 12 times estimated 2007 earnings per share of $4.68 in 2007. That yields a price target of $57, which would be up 34% from the current level.

And finally, here's an airline idea for more conservative investors: Consider taking a stake in a recent IPO called Aircastle ( AYR), a Connecticut company that acquires and leases commercial jet aircraft to passenger and cargo airlines worldwide. It aims to pay out 100% of its net income in cash dividends, which makes it sort of a REIT in the sky.

The company this month announced that it had entered into an agreement to purchase 38 aircraft for $1.6 billion through February 2009, a dozen of which are freighters. I like AYR as a play on global freight and because it can earn a lot of money by borrowing cheaply and buying and chartering wisely. Its fourth-quarter dividend beat expectations by 15%, amounting to 43.75 cents a share. Figure you can get up to 20% earnings growth and a dividend of around 6.2%. My target for 12 months is $36, which would mean the potential for 30% total return.

The airlines have broken a lot of investors' hearts over the years. If they work out for another six months to a year, don't think they will work forever. Take the money and run.

At the time of publication, Jon Markman did not own or control shares of any of the stocks listed in this article.

Jon D. Markman is editor of the independent investment newsletter The Daily Advantage. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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