Why Are Airline Stocks Flying High?

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Oil is in retreat. After topping out at about $145 a barrel, the price of oil has fallen some 20% over the past month. At the same time, the shares of airline stocks have been soaring. JetBlue (Nasdaq: JBLU) is up nearly 80% in the past month. Delta Air Lines (NYSE: DAL) has risen nearly 90%. And United Airlines (Nasdaq: UAUA) has nearly quadrupled in value. What gives?

It doesn't make sense to me.

Sure, oil's decline has eased pressure on the industry, but it's still at $115 a barrel. Weren't the airlines digging their own graves when oil breached $100 a barrel back in April for a sustained period of time? United's shares plummeted by 78% from April to July. American Airline parent AMR (NYSE: AMR) fell 46%, and Continental Airlines (NYSE: CAL) was down 48%.

Standard & Poor's predicted two years ago that if oil topped $100, Northwest Airlines and Delta could be forced to liquidate, while others might seek bankruptcy protection; Southwest Airlines would likely see its string of profitable quarters broken; and throughout the industry, carriers would ground flights, lay off workers, and cut services.

Given that oil prices of $100 a barrel -- $15 below current prices -- were enough to vaporize profits at many airlines, it's hard to get excited about the industry in the short or long view. And considering that there's no guarantee oil prices will stay low, investors would be wise to exercise caution in letting their money take flight.

While airline travel itself may be a screaming bargain these days, the airlines remain grounded as dangerous investments.

Stop in the hangar with these related Foolish articles:

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