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Fuel Prices - The Airline Industry's Toughest Headwind

Few factors take the wind out from under its wings like costly fuel.

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The airline industry has made tremendous strides recently, after surging fuel prices, highly restrictive credit markets, and a debilitating recession pushed all carriers to the brink just three years ago. Subsequently, airlines smartly adopted an aggressive pricing scheme, and the reassuring upturn led the sector to impressive profitability during 2010. Current share prices indicate investors may now have a more constructive view toward both the industry's attractiveness, and the larger airlines' ability to compete more effectively going forward.

However, our view diverges somewhat from that rosy scenario. We suggest investors steer clear of many of these names. At their current market valuations, we think there's little margin of safety to make this an attractive entry point. In addition, while the industry has combated rising oil prices with fuel surcharge-like price increases, we don't believe that these pricing actions can offset recent cost increases. As a result, in early March, we lowered our fair value estimates for all of the legacy carriers, including:  AMR (AMR),  Delta (DAL),  United-Continental Holdings (UAL), and  US Airways (LCC).

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Basili Alukos does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.