There are holes in the thesis. While Fintzen is bullish on the idea that bigger dividends and stock buybacks can boost shareholder returns, every major U.S. airline pays a lower yield than the S&P 500 average of 1.96 percent. And the reliance on baggage and ticket-change fees is a potential vulnerability. As a group, airlines would be losing money without them, even with planes flying almost as full as they can get.
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In fact, the NYSE ARCA Airline Index is trading at less than half of the level it was when the index was launched in the 1990s, because of investor skepticism that the good times can ever last for airline stocks. "I don't think everyone has bought into the idea that this time is different,'' DeNardi said. "If you see airlines adding capacity faster than [the economy] grows, that would be the red flag."
Things could get a little bumpy
Airlines have finally shown some weakness amid the broad market selloff, with American, Delta and United down more than 10 percent from recent highs. At least some of that selling is likely related to hedge funds cashing in on profitable positions to cover losses rather than a valuation call on the airline stocks themselves.
CNBC's Bob Pisani recently explained, "The margin debt of these funds is very high, so when they are under pressure, they need to sell their most stable and profitable positions to cover losses and, possibly, margin calls. Guess what those positions are? Yep. Airlines."
The Stifel analyst expected some degree of choppiness going into the quarter given the adverse weather earlier in the year, but said the degree of underperformance has been somewhat surprising. "We're still bullish longer-term on the industry—particularly Delta, Spirit, United, and Allegiant," he wrote in an email. The next key data point will be first quarter earnings and the commentary provided regarding demand and pricing trends going into the summer, which Stifel expects to remain healthy.
Airline stocks remain a well-timed buy rather than a buy-and-hold sector by nature. DeNardi said it's a calculated bet on the newly restrained competition, an increasingly solid recovery and the airlines' ability to wring extra revenue from already-scheduled flights. Would-be start-up airlines are unable to find backers, fares are rising, and a new stream of fee revenue, even if unpopular, all add up to another 20 percent appreciation for the recently profitable airline stocks—and maybe even more lift, Fintzen said.
"We would be buyers on any sell-off associated with 1Q EPS softness attributed to the weather or other non-recurring items as long as the longer-term demand environment remains healthy," DeNardi said.