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Time To Short Airlines?

5 January 2010 No Comment

Airline stocks have hit new highs recently.  The optimism surrounding the economy has spread to the airline sector, hoping for an increase in business travel as well as tourism.  While the trend is powerful and it can be dangerous to short, it might be worth checking out.

For example, the Claymore/NYSE Arca Airline  (FAA) is up significantly.  This ETF gives you a broader airline sector instrument versus buying/selling individual airline stocks.

Claymore/NYSE Arca Airline ETF (FAA) Chart

My problem with the airlines is that when they had record numbers of travelers during a booming economy, they were still losing insane amounts of money.  Similar to companies like General Motors (GM) which lost tons of money during record sales, it seems like the problem isn’t the economy, but rather a flawed business model.

There are significant warnings in investing in such a sector:

  1. Not profitable during record sales
  2. Heavy unionized labor force
  3. Profitability hampered big time by rising oil costs (a real possibility)

If shorting isn’t your thing, then I’d definitely recommend doubling your due diligence if you’re thinking of buying into the airline sector, especially at 52 week highs.

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