Avoid Airline Stocks And ETFs With $100 Oil

| March 8, 2011 | 0 Comments

Last weekend I took the family on a weekend getaway to the beaches in South Florida.  The sun, sand, and surf were great.

Too bad I can’t say the same thing about commercial airline travel…

The family and I flew Continental Airlines.  The old guard airline used to pride itself on great service.  But now they’ve even eliminated there in-flight bag of pretzels.

Really!?!  No pretzels?

It may not seem like a big deal but it shows just how hard it is to find quality air service these days.

We departed from Phoenix, Arizona.  Then after a quick plane change at George Bush International Airport in Houston, Texas, our connecting flight landed us in Miami, Florida.

Or that’s what was supposed to happen…

Here’s what actually happened.

Our flight from Phoenix to Houston went off without a hitch.  But when we landed, we saw our connecting flight had been delayed from 1:15pm to 2:45pm.

An hour and a half delay isn’t the end of the world.  We’ll just use the extra time to grab a bite to eat between flights.  So we set off down the terminal in search of something to eat.

We returned to the gate at about 2:00pm.  A full 45 minutes before our delayed flight was scheduled to leave.  Much to our surprise, the worker behind the counter at our gate informed us our flight had left an hour earlier.

Man, that’s a kick in the guts…

For a moment, my head was spinning.  Why would an airline delay a flight by an hour and a half only to have it depart an hour earlier?  If there’s any chance of the flight leaving earlier, then say so…

In the end, we were able to catch a flight a few hours later into neighboring Fort Lauderdale Airport and the rest of our weekend getaway was great.

However, the bad taste our airline experience left in my mouth motivated me to take a closer look at the airline industry.

You see, in mid-2010, I was extremely bullish on airlines.  I even recommended the Claymore/NYSE Arca Airline ETF (FAA) in the September issue of Sector ETF Trader.

At the time, FAA was trading for around $36.  I set a price target of $42.50.

The International Air Transport Association (IATA) had just tripled their 2010 airline industry profit forecast.  The IATA was projecting industry profits would hit $8.9 billion.  A huge increase from the $2.5 billion it forecast in June.

Everything looked great for the airlines at the time.

Demand for flights was 3% to 4% higher than before the recession.  Cost cutting throughout the recession had reduced expenses.  And stable oil prices allowed airlines to expand their razor thin profit margins from 4.5% to 7.3%.

The positive news sent FAA screaming higher.

Sector ETF Tradersubscribers were able to grab 17.5% gains on FAA as it shot from $36 to over $42.50 in a matter of weeks.

Now the tide is turning on the airlines…

Soaring oil prices have always been the industry’s Achilles’ heel.  And it’s no different this time around.  As oil prices move past $100 per barrel, the airlines profit margins are feeling the squeeze.

As a result, a number of airlines are dialing back growth plans.

What’s more, airlines are steadily raising ticket prices.  Almost every major and regional airline recently added $10 to $20 per ticket.

The bottom line is $100 oil is causing the airline industry to “batten down the hatches”.  They’re cutting services, raising ticket prices, and dialing back growth plans.  These are clear signs the airline industry is heading for a rough patch.

Since FAA hit my $42.50 price target, it’s been trending lower.  And there’s no reason to believe the airlines will turn things around in the near future.  This is one industry you want to avoid investing in right now.  Things are bound to get worse before they get better.

 

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Category: ETFs

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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