Can the Jet Set Reform Itself? By Andrew Gordon 
The airline industry is a mess. Things are so out of whack that one airliner, American Airlines, announced last week that it was going to charge for the baggage that passengers check. Two things are obvious here. One, American thinks they’ve raised prices as much as they can without causing customers to bail out on them in droves. Two, they’re either clueless or clearly out of options. The airline industry is long overdue for some serious consolidation. And it’s finally beginning to happen. In April, Delta and Northwest decided to hook up. And now talks are heating up between United Airlines and Continental. But despite all the time airlines have spent in and out of bankruptcy, it’s still the same old talk about cutting costs, cutting corners and raising prices when the market allows.
For example, here’s the brilliant strategy that Delta's president, Edward Bastian, articulated in response to high jet fuel prices: “We have moved quickly to mitigate the short-term impact of higher fuel prices by further reducing domestic capacity and taking a disciplined approach to costs and cash flow." YAWN. It doesn’t take a genius to figure out how airlines are doing. All you have to do is follow crude prices. The airline stocks move more or less in the opposite direction. 
The U.S. Oil Fund (USO), the dark blue line in the chart, tracks the spot price of West Texas Intermediate (WTI) light, sweet crude oil. When it was going down in the second half of 2006, airline shares were going up. With oil taking off in 2008, the shares of airlines have plunged. The problems plaguing U.S. airlines should be well-known by now: unionized pay scales, legacy health and pension obligations, and a bloated and demoralized work force. In many ways, the airlines have been their own worst enemy. They’ve cut back and cut back on services and perks, that they’ve essentially commoditized themselves. How do you distinguish one airline from the other? One serves crackers and the other serves peanuts? That’s sure to cultivate customer loyalty. They have only one trick in their bag of goodies which saves them from being completely commoditized. And that’s their frequent flyer plans. But you know what? It feels more like blackmail than a perk. I’ve stacked up a couple hundred thousand frequent flyer miles with Northwest. But I don’t care anymore. I hardly fly Northwest. Their service is mediocre and their tickets are expensive. I go mostly with the newer low-cost carriers. Have I made my case? There are plenty of reasons to hate airlines. As a passenger and a consumer, I’m not going to make you fly on any airline that is pissing you off. But, as an investor, I’d like you to reconsider your feelings about the airline industry...
First of all, in terms of affordability, air travel has flown in the opposite direction of things like higher education, houses, and designer jeans. When I first flew to England back in 1973 to attend Lancaster University, the two-way flight cost me around $525. When I flew Rachie – my daughter – to England last year to attend Norwich University, the round trip cost $600. That’s nothing short of astounding. Taking into account inflation, the $525 price would have more than quadrupled. In real money terms, that ticket now would cost $2,444. It may not feel like it, but flying is a ridiculous bargain. People have to fly. And, globally, it’s inevitable that they’ll be flying in greater numbers. Higher prices may slow this trend, but it won’t reverse it. Flying is already taking off in Asia. For example, China’s domestic airline industry is just a fifth of the size of the U.S.’ domestic market, but it’s growing much faster. In 20 years time, it’ll be about half the size of the U.S. market. And market liberalization is in the air. Many more markets will soon receive a strong boost as governments ease regulations. New Open Skies agreements between the European Union and the United States and Canada are a start. Further market reform will open up Asian and North African markets. The result? The global airline industry will outperform the world economy in the coming years. 
Source: Boeing
The airline industry isn’t so much broken as it is overcrowded. It’s mainly a matter of too many seats available for too few customers. If the industry continues to consolidate, supply and demand should rebalance. And then investors will be able to focus on the solid fundamentals of the industry – reasonable prices and growing demand. But that’s down the road a bit. For those of you who can’t wait, there is a way to invest now in the aerospace sector. My next article will show you how. Good Trading, Andrew Gordon P.S. To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com. [Ed. Note: With a bear market looming, it’s more important than ever to select safe investments that produce monthly dividend income. Click here to learn about Andy Gordon's INCOME service that selects the best dividend-paying stocks available.] Go on the Offensive with These "Defensive" Stocks By Andrew Gordon First-quarter GDP was recently revised upward to 0.9 percent. I’m not going to get into how that affects the “are we or aren’t we in a recession” argument. But I want to break down the data to see where this miniscule growth is coming from. 
As you can see, aside from the buildup of inventories and an increase of imports, the only other positive sector is national defense. Perhaps that’s not surprising – our numerous “Pax Americana” obligations around the world are extending the U.S.’ military capabilities to the stretching point. And, in the process, costing a ton of money. But many companies in the defense sector are benefitting. And aerospace companies getting a substantial portion of their revenues from the U.S. government are doing quite well these days. Despite enjoying nice runs up the chart, they still sport some very impressive value and growth metrics. For example: Integral Systems (ISYS): Forward P/E 17, PEG 0.75, revenue growth last quarter of 55 percent, operating margin of 17 percent. Curtiss-Wright (CW): Forward P/E 16, PEG 1.2, revenue growth last quarter of 30 percent, operating margin of 11 percent. Orbital Sciences (ORB): Forward P/E 24, PEG 1.6, revenue growth last quarter of 30 percent, operating margin of 8 percent. Esterline Technologies (ESL): Forward P/E 15, PEG 0.6, revenue growth last quarter of 45 percent, operating margin of 9 percent. Doing a little math by dividing their forward P/E by the PEG, you can see that future earnings growth for these companies is projected at annual rates of 13 percent to 25 percent. And a recession isn’t going to cut into military spending. That means these companies should continue to fly high. INTERNAL ENDORSEMENT Imagine if There Were Only 6 Numbers to
Choose from When Buying a Lottery Ticket! Wouldn’t that be great?! Of course, the less the number of choices, the more likely your chance of success, right? How many choices are there when buying and selling shares? Errmm… a LOT! Hundreds…One of the reasons I enjoy such consistent success from trading, is because I only have 6 options to choose from! Except this is even better in a way, because the lottery is pure luck… I only have 6 choices AND have a VERY good idea about which choice to make because of the insider signal | If you enjoy IDE's daily investing advice, you'll definitely be interested in checking out our sister publication, Early to Rise. Each morning, you'll get powerful wealth-building advice covering real estate, entrepreneurship, personal finance, marketing, and much more.
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