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ETF Specialist

Betting Against Airlines Through an ETF

Use an ETF to short an overvalued and heavily uncertain industry.

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For investors in most airline companies, 2010 has been a terrific year. Most air carriers' stock prices soared in 2010--a marked departure from the previous several years of pain from a weak economy, excess capacity, and oil price increases that in 2008 made fuel expenses their highest percentage of airline operating costs ever.

Driving this outperformance have been both fundamental and non-fundamental factors. The industry has emerged from the recession healthy, with passenger volumes rising nicely on effectively flat ticket prices and the carriers' non-fuel costs down or growing modestly at best. In addition, stock prices have been buffeted by a wave of consolidation that has begun taking place;  Southwest Airlines (LUV) recently announced that it will acquire fellow low-cost carrier  AirTran Holdings (AAI), and United Airlines owner UAL Corporation recently merged with Continental Airlines to form  United Continental Holdings (UAL), the largest airline company in the world. These deals have come on the heels of  Delta Air Lines (DAL) acquiring Northwest Airlines in 2008, and they have helped underscore the fact that the entire airline industry seems to be embracing capacity discipline and is focusing on cost containment. In addition, investors ostensibly are pricing acquisition premiums into some of the remaining names in the space.

Robert Goldsborough does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.