Airline ETF Flying High, But Will It Stick?

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Airline stocks and their related exchanged traded fund ( ETF ) recently touched 52-week highs, having been swept up with the broader market rally. But does the airline industry have the fundamentals to continue earning for investors?

According to Glenn Curtis of Investopedia , there are some concerns looking into the future of the airline industry. Higher fuel prices will pinch margins and lead to increased ticket prices while continued high unemployment, rising interest rates and higher taxes will all reduce the amount of discretionary income. [ What's Behind Airline ETF Comeback? ]

Of course, these concerns are not guaranteed to develop, but fuel prices are forecast to average $81, up from $62 in 2009, unemployment has a long way to fall, interest rates will most likely rise toward the end of the year and higher taxes seem almost inevitable given our government's spending.

Instead, Curtis recommends looking into Boeing (NYSE: BA ), which he believes will be more resilient because of its military contracts. On the other hand, Deepa Seetharaman and John Crawley of Reuters think there might be some upside potential as airlines try to consolidate resources in an attempt to boost revenue and margins. Exposure to Boeing can be had in PowerShares Aerospace and Defense (NYSEArca: PPA ) , which is 6.6% of the fund. [ Why Aerospace and Defense Is Bullish. ]

Seetharaman and Crawley report that a merger between United and Continental would be strategic in the sense that it would have the best chance of clearing labor and antitrust hurdles. The merger would make the combined company the largest airline in the world with annual revenue of $28.9 billion, based on 2009 figures. [ The Top 6 ETFs of the First Quarter. ]

A different scenario would have United (NASDAQ: UAL ) and U.S. Airways (NYSE: LCC ) merge to create the third-largest carrier in the world. But the merger would have a much tougher time jumping regulatory hurdles.

Absent a merger, some analysts, unlike Curtis, still like the industry. Jesup & Lamont managing director Helane Becker thinks airlines such as Continental (NYSE: CAL ), Delta (NYSE: DAL ), United, and American (NYSE: AMR )  "will do fine."

For more stories on the airline industry, visit our airlines category .

  • Claymore/NYSE Arca Airline (NYSEArca: FAA )

Sumin Kim contributed to this article.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: ETF , FAA

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