THE PARTY SEASON IS NIGH AND SO WHAT BETTER WAY TO KICK OFF THE LAST LEG OF 2010 THAN TO REFLECT ON THE POSITIVE

Dino D'Amore
By Dino D'Amore December 3, 2010 21:58

THE PARTY SEASON IS NIGH AND SO WHAT BETTER WAY TO KICK OFF THE LAST LEG OF 2010 THAN TO REFLECT ON THE POSITIVE

For many 2010 has been the year of terrific airline investment opportunities; a complete turnaround on the previous decade when airlines occupied the territory of investment pain.

During 2010 stock prices have been buffeted by a wave of consolidation that has begun to take place: BA/Iberia, Southwest/AirTran and United/Continental being the major highlights that have gone through. These deals have helped underscore the fact that much of the airline industry, with the exception of some Middle East airlines, seems to be embracing capacity discipline and is focusing on cost containment. In addition, investors are ostensibly pricing acquisition premiums into some of the remaining names in the space.

Investors in almost all airline companies have been rewarded in 2010. US Airways (LCC) rose 144%, United Continental, was up 125% in the first 10 months of 2010, Alaska Air Group (ALK) increased 53%, and AirTran, buoyed by its purchase offer by Southwest, rose 42%. Other players also have registered good gains, including JetBlue Airways which is up 28%, Delta Air Lines is up 22%, Ryanair is up 22%, and Southwest up 20%.

Of course open-end mutual funds have modest exposure at best to the airline industry with 14.5% being the market average cap of assets in airlines. Instead, it is the exchange-traded fund (ETF) structure that offers flexibility for investors that traditional mutual funds can not offer including the ability to short an ETF that an investor believes is overvalued. One ETF that has impressed of late is Guggenheim Airline (FAA), which began trading in early 2009 and which has nearly doubled in price since that time. A concentrated ETF that holds just 23 airline companies, Guggenheim Airline is a modified equal-dollar-weighted fund, with large allocations devoted to United Continental (accounting for almost 19% of assets), and Delta and Southwest (each of which comprises another 15% or so of assets). Just over 75% of assets are invested in US airlines; other US-listed companies that FAA holds include US Airways, JetBlue,  AMR Corporation (AMR), SkyWest (SKYW), Alaska Air Group, and Ryanair Holdings. Given this information there can be no doubt that Guggenheim Airline is a good short opportunity for any investor with heart.

It would not be a surprise to see other ETF providers launch niche aviation-themed ETFs in the near future but they would have missed the best of the action. The joint spectres of excess capacity and oil price increases are on the horizon and so the 2010 airline investment bonanza is unlikely to continue beyond 2011.

Dino D'Amore
By Dino D'Amore December 3, 2010 21:58
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