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Airline Industry Scores a Win in 2013

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By: Sam Quest
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The US airline industry has been the best performing industry on the Dow Jones in 2013. The Dow Jones US Airlines Index (DJUSAR) has recorded gains of 88.4% so far this year and if estimates for next year hold true, the industry could witness another high flying act in 2014.

Among the many companies in the industry, Delta Air Lines Inc. (DAL) has been the darling of investors and the company’s stock has returned over 125% for the year. In contrast, Southwest Airlines Co. (LUV), the biggest low cost carrier in terms of revenues and passengers carried, returned 83% YTD while Jet Blue Airways Corp. (JBLU) is up 47.5%.

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The year 2013, was witness to the mega merger of two legacy carriers, after American Airlines and US Airways got a nod from the regulators to complete the transaction, to form the American Airlines Group (AAL). The new entity started trading on December 9, and is up 1.4% as of the last trading day.

The last major mega merger in the industry was that of United Airlines and Continental Airlines in 2010. The latest merger now leaves three major, full service airlines in the US.

The International Air Transport Association, a representative and lobby group for some of the largest global airlines, expects the industry to see off 2013 with profits of $12.9 billion. The group cited increasing passenger volumes and falling fuel prices as reasons for airline industry’s higher profits. Profits for 2014, according to the same report, are expected to jump 50% to a record $19.7 billion.

The industry also focused on increasing efficiencies during the year. Consolidation of flight routes reduced operational costs for major carriers even as margins continued to stay low. Companies have also invested heavily in new aircraft, ordering record numbers of fuel efficient and technologically advanced airplanes such as the Boeing Company’s (BA) 787 Dreamliner. Fleet sizes grew in 2013, as the industry continued to prepare for a busier 2014.

While passenger traffic was a bright spot in the industry, cargo volumes remained stagnant. The industry is expected to cap off the year with $60 billion in cargo revenues, $7 billion off its 2011 peak. Revenues for the segment in 2014, are expected to remain unchanged from the current year.

Even though the outlook for the airline industry has improved dramatically from a year ago, US-based airlines face immense competition in both local and international markets. Margins continue to remain under pressure and the anticipation of a rise in fuel costs in 2014, the industry’s largest expense could lower expectations moving ahead.

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