Look! Up in the Sky!

On the whole, it's been an excellent year for major airlines. Here's a list of top global carriers, ranked by one-year returns and their star ratings in our Motley Fool CAPS investor intelligence database:

Notice that I'm not including JetBlue (NASDAQ:JBLU), Southwest (NYSE:LUV), or any of the other regional carriers in this analysis. Here's why: Conventional wisdom says that the regionals are the only airlines worth your investing dollars. I'm not so sure that's true. So I put the big boys to the test instead.

Throwing the book at the airlines
How? I threw the book at them. Book value, that is.

Book value measures corporate net worth. As such, it can help in deciphering the real value of firms whose earnings and cash flows are consistently inconsistent. Firms like, say, airlines. (Find out more about book value.)

But there's a problem with this approach: While we'd want to see a low multiple, very low price-to-book stocks are notoriously risky. Most often, low book value describes a broken firm. Therefore, my search for attractively priced carriers had to include some additional qualifiers.

I started by narrowing my emphasis to tangible book value, which discounts the assessed value of airy assets like brand name and goodwill. Then, I eliminated carriers that weren't delivering above-average returns on assets and capital. Finally, I cut airlines that were trading for an unattractive multiple of enterprise value-to-sales.

And that left ... no one. Not a single carrier.

Not yet at cruising altitude, but still climbing
But one, British Airways, got within spitting distance. Have a look at the numbers:

That's a pretty good showing. And the story improves when you consider that, just five years ago, BA was producing negative returns on assets and capital.

But executives seem to believe they can do even better, saying they're on track to realize more than 450 million British pounds in cost savings by March 2008. If they're right, BA could produce double-digit operating margins for the first time in at least a decade.

Still, huge risks remain. Pension obligations, on-again-off-again labor strife, oil prices, Mother Nature, and ambitious legislation called "open skies" that would dramatically boost competition could all conspire to send this stock into a tailspin.

The Foolish bottom line
Though Peter Lynch made some of his best investments in horrific industries, such as steel in the 1980s, most investors do best when they avoid the worst. Major airlines, sadly, remain among the very worst of the worst. Invest accordingly.

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Fool contributor Tim Beyers, ranked 1,300 out of more than 24,600 in CAPS, is fond of international travel but has yet to fly British Airways. He's partial to Virgin Atlantic's Upper Class cabin. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. All of his portfolio holdings can be found at Tim's Fool profile. His thoughts on travel, Foolishness, and investing in general may be found in his blog. JetBlue is a Stock Advisor pick. The Motley Fool's disclosure policy is always on time for departure.