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Airline industry finds some wings

Today's Financial News - Posted October 30, 2008

The nation’s airline industry is soaring today. Thanks to the Delta (NYSE:DAL) and Northwest merger, companies across the industry are jumping.

By Andrew Snyder

Baltimore – (TFN): After nearly a decade of getting kicked around by the nation’s investors, airlines are finally starting to get some positive attention. More importantly, the barrens of the friendly skies are finally starting to look like profitable ventures.

Notice, however, that I “starting” to “look” like profitable ventures. As of last quarter, the only major airline to post a profit was AMR Corp. (NYSE:AMR), the owner of American Airlines. And its earnings were a mere pittance of total revenues.

All the rest, companies like Southwest Airlines (NYSE:LUV), Delta Air Lines (NYSE:DAL), and United Airlines (NYSE:UAUA), all lost significant sums of money.

But the airline environment is drastically different than it was just a few months ago. For one thing, oil prices are significantly lower. Even better, it looks like folks are still willing to take to the sky even as the economy slows. Airline bookings have exceeded industry estimates.

Just as I said in an earlier article, the outlook may not be that bad for the nation’s economy.

Blazing the trail

While industry sentiment is on the rise, investors are looking at other airline industry news today.

I am sure you have already heard Northwest and Delta have finalized their merger deal. In a $2.6 billion all-stock acquisition, all of Northwest’s operations will be under the Delta umbrella by next spring.

The deal created the world’s largest airline, a veritable flying behemoth. With over 75,5000 employees, routes to 375 cities and 66 countries, Delta will be the industries dominant player.

That is, unless another super-airline emerges.

You see, the real news from the Delta/Northwest merger is not that the combined company will create $2 billion in revenues and cost savings for Delta, with over $500 million in savings next year.

What investors are truly celebrating is the fact that such deals are possible. When federal regulators gave their nod, it proved to investors that mergers would be allowed and showed the synergistic qualities such moves could make.

Now investors in airlines like United, American, and Southwest are wondering what lies in store for them.

Everybody wants in

Across the Atlantic, Sir Richard Branson, the owner of Virgin Atlantic is digging through his contact list looking for an opportunity to strengthen his airline’s core business. Rumor has it, he may be close to a deal with a long-time rival, British Midland Airways.

All across the airline industry, share prices are soaring today. Investors are looking into the future and liking what they see.

That is good news for investors that bought shares last week. What about folks looking to invest today?

I say, do not fall into the airline trap. The gains will not continue.

The nation’s airline industry has been in trouble for nearly a decade. A slowing economy, fuel prices that remain historically high, and a customer base that absolutely hates the service they are receiving is far from good news.

Instead of investing in a risky, cyclical business like an airline, search out companies with strong histories of success that are selling at decade-low prices. For a list of four of my favorites, click here.


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Posted by Andrew Snyder · Filed Under Investment Strategies 

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