Discount Carriers to Watch

After some optimism, the U.S. airline sector is again under pressure after the recent terrorist plots to blow up 10 planes was discovered in London. The renewed fears of terrorist attacks on planes as we approach the fifth anniversary of the tragic events of 9-11, will clearly put a damper on air travel, at least in the near- term, but then this could be the new reality of air travel.

 Add this to high fuel prices and you have a sector that continues to fight for everything. Since bottoming out in September 2005, the airline sector has been showing some optimism, but the trend has been largely sideways this year. The AMEX Airline Index (^XAL) is trading at around the mid-point of its 52-week high low. There is strong resistance at the 55 level. A strong upside break at 55 could see a move towards the 60 level, last encountered in December 2004. But don’t count on it for the time being as the airline industry will remain dead money in the immediate future.

 The renewed strength in oil prices to over $70 a barrel is a major factor continues to hurt airline stocks. We are seeing a pickup in travel, albeit there are competitive pricing pressures impacting margins.

 And now with the terrorist attacks fresh on the mind of travelers, it could drive demand lower. The reality is airlines as an investment at this time is not viable. The risk is too high. The industry fundamentals are precarious. There are better areas to invest your capital.

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 But should the situation calm down, I do favor the discount airlines.

 At the top of my list is the granddaddy of all discounters and the one every player wants to emulate, Dallas, Texas-based Southwest Airlines Co. (NYSE/LUV)

 Southwest Airlines started with three Boeing 737 aircrafts in June 1971, serving Dallas, Houston, and San Antonio. Today, Southwest is the dominant discount or low fare airline in the U.S. with 400 Boeing 737 aircrafts. Its routes are focused on the U.S. and are generally short haul and high frequency, but there are long haul routes.

 The carrier focuses mainly on point-to-point routes (direct non- stop city to city) rather than hub-and-spoke service (including indirect flights). This is a significant difference favoring Southwest. In spite of the carnage in the airline industry, Southwest has been reported some decent numbers over the past few years. Its ability to turn a profit year-after-year is impressive. Southwest has been profitable for the last 32 consecutive years. That is truly impressive.

 Its low cost structure and experience at running a discount carrier for over 20 years gives the company an advantage over other low fare carriers and the major airlines. Other discounters to keep an eye on include Frontier Airlines Inc. (NASDAQ/FRNT) and JetBlue Airways Corp. (NASDAQ/JBLU).