The skies have been unusually friendly of late for investors in the fickle airline industry. Over the past year through October 28, the NYSE Arca Global Airline Index surged 83.9%, walloping Standard & Poor’s 500-stock index by 68 percentage points. The Guggenhiem Airline ETF (FAA), which tracks the airline index, leapt 79.7%, giving it a tracking error of 420 basis points, or 4.2 percentage points.
Can the sector keep it up? Don’t bet on it.
One big reason for the airlines’ big move is that they are classic cyclical stocks. When the economy takes a dive, travel is one of the first expenses cut by both businesses and vacationers. As the economy picks up, airline profits rebound robustly as businesses reinstate travel budgets and start filling planes with passengers paying full freight, as opposed to leisure travelers who buy the cheapest tickets they can find. The International Air Transport Association, a trade group, recently boosted its estimate for the industry’s 2010 profit, from $2.5 billion to $8.9 billion. The industry lost $9.9 billion last year, according to IATA.
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