When the economy is solid, demand rises and more people fly. But a rising economy also pushes up oil prices and offsets the airlines’ bottom line. Add to that the large number of carriers within the industry all fiercely competing and battling to win passengers, and that eats into profitability, too.

When the economy is struggling and the job market is poor, many people have less disposable income – and consequently fewer people want to fly. Here in Baltimore, for example, BWI Airport saw 7.5% fewer passengers in March, compared with March 2008. In addition to less demand, oil is a volatile resource, under threat from geopolitical shenanigans at any time.

Right now, of course, we have the latter. And the numbers paint an ugly picture…

Consider the following ugly bunch of data from the International Airline Transport Association (IATA).

1) From an estimated $4.7 billion loss as recently as March, it now forecasts $9 billion worth of losses.

2) Airline industry revenues are projected to hit $448 billion this year – a 15% drop over 2008.

3) By region, the numbers show a $1 billion loss for North American airlines this year (much better than the $5.1 billion loss in 2008, but this is largely due to the oil price decline)… a $1.8 billion drop for European carriers… and a $3.3 billion tumble for airlines in the Asia-Pacific region.

4) On Monday, Japan Airlines, which boasts the best revenues in Asia, said it will cut its international routes by 10% during the current business year. It was the latest in a string of route cutbacks from global airlines.

5) The IATA says passenger demand will fall by 8% to just over two billion this year, with cargo demand suffering a 17% drop, as the global economy slumps.

Martin says an easy way to profit from airlines woes is to short the Claymore/NYSE Acra Airline ETF (NYSE:FAA). This relatively new ETF tracks highly capitalized and liquid US and international passenger airlines. FAA is down 12.6% since its recent May 6 high. And there could be plenty more pain on the horizon.

Martin recommends shorting two airline indexes: The Airline Index (AMEX: ^XAL) and the Claymore/NYSE Arca Airline (NYSE: FAA).  Good luck!

The Chicago-based aerospace giant also has unveiled a series of management changes it says will improve supervision of both supply-chain management and production quality at improving oversight of supply-chain and quality problems that led to delays on all of Boeing’s jet programs in recent months.

With the move, the fuel-efficient jet’s first flight has been shifted into the second quarter of 2009 and first delivery into the first quarter of 2010. Prior to the strike that halted much of the company’s commercial airplane work from early September into November, the 787 was to make its first flight late in the fourth quarter of 2008. First delivery was slated for the third quarter of 2009.

“Our industry team has made progress with structural testing, systems hardware qualification, and production, but we must adjust our schedule for these two unexpected disruptions,” said Scott Carson, president and chief executive officer of the Boeing Commercial Airplanes group.

“We’re laser focused on what needs to be done to prepare for first flight,” said Pat Shanahan, Boeing’s vice president in charge of the 787 program. “We will overcome this set of circumstances as we have others in the past, and we understand clearly what needs to be done moving forward.’

Included in the preparations for first flight, Shanahan said, are finalizing and incorporating remaining engineering changes and completing systems testing, qualifications and certification, Boeing said in a company announcement.

A Recent Record of Costly Delays

Boeing has long prided itself for delivering new aircraft on time. That’s why escalating problems with the highly complex Dreamliner – a fuel-efficient jetliner that can carry between 225 and 300 passengers – have turned what could have been a public-relations marvel into an embarrassment for Boeing

This newest delay would represent the fourth time that the company has had to tell customers holding orders for almost 900 of the jets that the delivery schedule will be pushed back. With each new delay, Boeing executives and marketing officials have assured investors and customers alike that the new delivery date was set in concrete – only to later be forced to set that date back again because the company was surprised by a new set of problems.

One of the problems with the program is that the Dreamliner is being made of highly sophisticated materials, and is being constructed by a network of suppliers that’s truly global in nature. The fact that so much of the aircraft is outsourced means Boeing is encountering a whole new set of logistical and technical problems that it’s never before encountered.

The company has attributed part of the delay to the 58-day strike by 27,000 of its unionized workers that ended in early November. The workers ratified a four-year deal and returned to work, but the cost was high.

Boeing delivered just four jetliners in November, even after the resolution of a strike that paralyzed the airplane-maker’s commercial aircraft business during the two previous months, Forbes.com reported Friday. That compares with five airplanes delivered in October – when the strike with the machinists was at its peak – and 12 in September – two of them before the strike began.

Boeing delivered 36 planes per month in August and July. The company also delivered 35 jetliners in November 2007, the company said on its Web site. Analysts say that Boeing usually delivers about 40 jetliners a month.

A New Role

For the Dreamliner program, Boeing is labeling itself as a “systems integrator” – rather than as a manufacturer, as it historically has been known – because of how thoroughly Boeing has outsourced production around the world.

In fact, in return for investing more upfront, and accepting a share of the high development costs, suppliers were able to get major sections of the Dreamliner to build. Boeing itself is responsible for only about 10% of the jet by value – chiefly the tail fin and the final assembly. The rest of the work is being done by 40 “partners” around the world: The wings are being built in Japan, while factories in Italy, South Carolina and Kansas assemble the bulk of the carbon composite fuselage. The landing gear is made in France.

Once completed, the components are loaded aboard a specially modified Boeing 747 cargo jet and flown to Everett, Wash. for the final assembly.  Boeing says that when the system is up and running, it will eventually be able to snap together Dreamliners in as little as three days, in a manner similar to assembling plastic model airplanes, Finfacts Irelandreported.

Sources told the Journal that Boeing has been meeting with its partners and suppliers on the jet program in an attempt to once again understand all the new challenges that have sprung up in part because of the big share of the program work that the company had outsourced.

Customers are getting quite irritated by the delays. In a recent interview, Virgin Atlantic Airways Ltd. Chief Executive Steve Ridgeway conceded that he’s “pretty fed up. We’ve got no clarity from Boeing.”

Virgin was originally due to receive its first Dreamliner in 2011, but Ridgeway said “we don’t know how long the delay is now.”

The Dreamliner, Ridgeway said ruefully, is “the world’s rarest airplane.”

A key area of concern: The continuing difficulty program participants are having as they try to work out software “bugs” in the millions of lines of computer code that run the airplane’s various systems, including cockpit flight instruments to the electric brakes required for stopping as the planes taxi or land.

Suppliers who were having trouble delivering completed sections of the airplane to Boeing have worked through the worst of their problems, but some officials at Boeing are still concerned about the ability of suppliers to turn out sufficient parts for seven or more airplanes a month.

Scheduling Uncertainty Remains

People familiar with the program said that Boeing managers had to figure out how much time they should build into the airplane’s schedule. Not only must Boeing find a way to produce the airplane reliably, it must also allow the Federal Aviation Administration (FAA) adequate time to certify the plane as safe to fly. That process alone could take as much as a year, say these people.

Virgin Atlantic’s Ridgeway agrees, recounting how his airline was also the first recipient of a new model jetliner from Boeing rival Airbus SAS – which went through the same sorts of delays and teething problems. The Airbus A350, which was delayed because of problems the European aircraft manufacturer had with its A380 Super jumbo, isn’t expected to be launched until 2013 – if not later. Airbus is expected to deliver the first A380 next week to Singapore Airlines Ltd. It is a double-decker plane that can seat more than 550 passengers and is designed for long-haul routes.

For that reason, Ridgeway says he knows that Boeing’s Dreamliner problems extend beyond the slipped delivery date.

A lot of attention has been focused on when Boeing will deliver its first Dreamliner, “but nobody’s talking about production run-rates” or problems the plane may encounter when it goes into service, Ridgeway said in the Journal interview. “Just getting the first ones delivered to a handful of airlines isn’t the end of the story.”

Boeing said last month that it was adding as much as 10 weeks to the delivery dates for all 3,734 jetliners it had on order to account for the International Association of Machinists and Aerospace Workers’ strike, which shut Boeing’s Seattle-area assembly plants for the better part of September and October. The company acknowledged that the strike made it impossible for the first Dreamliner to make its maiden flight before the end of the year as planned, but it did not alter the Dreamliner schedule.

As has been the case with delays encountered by arch-rival Airbus, Boeing has discovered that delays in the Dreamliner program are causing other development programs to slide – including a key one to update its 747 jumbo jet. Last month, Boeing said a new version of the four-engined jetliner – known for the distinctive hump on the top of its fuselage just behind the cockpit – would be as much as nine months late entering the market, in part because engineering resources were being gobbled up by the Dreamliner, the Journal said.

Source:  Latest Delays With Boeing’s Dreamliner Puts Program Two Years Behind Schedule

On the other hand, when it comes to buying bonds, investors have one tremendous advantage: The corporations that issued the paper are legally required to pay the bondholders their interest and then return their capital – on time. It’s not optional.

Remember the movie, Goodfellas? There’s a scene where someone has borrowed money from the mob to expand his restaurant. He learns a painful lesson. The godfather gets paid, no matter what. As the movie explains in graphic language: “Economy goes bad? F*** you, pay me. Restaurant burns down? F*** you, pay me. Wife gets cancer? F*** you, pay me.”

When you’re a bondholder, the same rules apply. No matter what happens to the business or the stock price, you get paid.

The other good thing about the bond market is that most individual investors know nothing about it. As a result, there are tremendous inefficiencies, simply because most investors don’t buy individual bonds. Why not? They don’t know how.

Our newest product, True Income, makes individual bond recommendations, the way our other publications recommend stocks. But unlike stocks, the moment you buy a bond, you’ll know exactly how much money you’re going to make and when you’ll get paid.

Mike Williams, our analyst, is a 62-year-old CFA who’s been buying and selling bonds since before I was born. And he’s structured the product so subscribers will make big, triple-digit gains in fixed income – something most people believe is impossible. If you’d like to learn more about how Mike does it, click here.

Poor Henry Nicholas III, former CEO of Broadcom. He made the classic playboy mistake: He hired a personal assistant named “Kato.” Kenji Kato sued Mr. Nicholas last year for back wages and proceeded to spill his guts in his legal filings, which found their way to prosecutors pursuing him for backdating options.

According to Mr. Kato, Henry Nicholas was a one-man Tasmanian devil of bad behavior: He spiked the drinks of technology executives with Ecstasy without their knowledge, used thousands of dollars worth of illegal drugs while at work, and hired “prostitutes and escorts for himself and customers.”

Once, on a flight to Vegas on his private plane, Nicholas allegedly smoked so much pot, the pilot had to wear a gas mask! He must have been a fun boss, eh? Well, until the cocaine made him paranoid and violent. To keep the prostitutes quiet, Nicholas allegedly offered them money and threatened to kill them.

Our favorite commodities pundit, Jim Rogers, gave an interview to Bloomberg this week, and his story’s largely unchanged… Jim is still short all investment banks through an ETF. He’s specifically short Citibank and Fannie Mae.

Rogers also announced he purchased airlines. His reason… “Everybody’s very bearish.” He said flights are full, fares are increasing, and if you ordered a new plane today, you couldn’t get it for several years due to problems at manufacturers. Also, 24 airlines have declared bankruptcy and “bankruptcies are signs of bottoms, not signs of tops.”

In the last issue of my newsletter, PSIA, I compared the current real estate bust with the giant San Francisco earthquake of 1906. In that disaster, people set fire to their homes because they didn’t have earthquake insurance but they did have fire insurance. The resulting inferno destroyed 500 blocks – essentially the entire city. The earthquake didn’t cause most of the damage… the fires did.

The same thing is happening now in our mortgage markets. Home prices would probably stabilize. But the fraud and the crime that’s following the disaster is the real problem. No one will take responsibility for his actions. And that’s going to bankrupt just about everyone in the mortgage business.

SEC Chairman Christopher Cox thinks it’ll make everything all better if bond-rating agencies just put an “s” on the end of their ratings of structured finance products. One SEC commissioner objected to the plan, not because it’s just plain stupid, but because he said it was like putting a “scarlet letter” on those products. That’s roughly equivalent to worrying Britney Spears is getting too much negative press.

Regards,

S&A Research

The S&A Digest is written by Porter Stansberry, Dan Ferris, and Sean Goldsmith.

Source:  The Best of The S&A Digest  Saturday, June 14, 2008

A Morgan Stanley forecast of crude oil prices at $150 within the month added further support to oil’s climb.

“I can’t think of a sector more vulnerable to soaring oil prices than the airlines,” writes Andrew Gordon in Investor’s Daily Edge.

Every dollar increase in the price of a barrel of jet fuel adds more than $1.3 million to the daily operating expenses of the U.S. airlines industry.

The auto sector comes close, especially companies like GM, Ford, and Chrysler that depend heavily on truck sales. But at least auto companies can change their mix of vehicles to adapt to high gas prices. They may not be able to sidestep all the pain of high gas prices, but at least they have options.

So what options do the airlines have? They’ve already cut costs to the bone. And from the feedback I’ve received, it seems like they’ve royally pissed off passengers and employees alike.

“It’s the end of an era in Detroit,” says Mike Burnick in the Offshore A-Letter.

At Wednesday’s General Motors (GM) shareholders meeting, the company threw its business strategy into reverse gear. GM will chuck its heavy dependence on the truck, and go green instead… giving its alternative hybrid-electric car the go-ahead.

GM and the other big-three Detroit automakers have feasted on the fast-growing market for pickup trucks and SUVs for years. But with gas now above US$4 a gallon and climbing fast, big-rig drivers are mailing their keys back to the auto finance companies today.

I’ve talked to a half-dozen people in just the past few weeks who are ALL trying to unload their big gas-guzzling trucks or SUVs. One friend of mine drives a Chevy Suburban: GM’s top-of-the-line road hog. She’s had it for sale over a month now…No takers. In fact, even the local Chevy dealer won’t take it!

Anyway, back to the GM shareholder meeting… In its quest to stop bleeding red-ink, GM is backing-up its entire business plan. The company is shuttering four U.S. production plants – all of which built trucks or SUVs.

“Higher gasoline prices are changing consumer behavior, and they are significantly affecting the U.S. auto industry sales mix,” says CEO Rick Wagoner. Imagine that!

Now that $2 gas is gone forever, GM has very high-hopes for its plug-in electric hybrids. GM should have made that switch years ago, rather than being asleep at the wheel and building Hummers instead.

You may not find these battle-ready Hummers on GM car lots much longer – but be sure to look for sleek new plug-ins coming to a dealer near you for the 2010 model year.

My little brother dropped in to visit last weekend. It was his first trip to Northern Nevada, so I gave him the full Monty. To balance out the downtown Reno blackjack-and-greasy spoon experience, we had Sunday brunch at the Lone Eagle Grill.

The Lone Eagle is a chalet-inspired lodge and restaurant on the north shore of Lake Tahoe. (I used to be a two-minute drive from the place; now it’s about 25 minutes.) Everything in the Lone Eagle is pine and cedar and crystal, with giant stone fireplaces and exposed wooden beams in the 20-foot high ceilings. One might call it rustic opulence.

On this day, Lake Tahoe was particularly gorgeous, in full view from the floor-to-ceiling windows on our right. The boats were out, sails unfurled; the water was a deep serene blue as far as the eye could see. An outline of the distant Sierra Nevadas completed the picture, the last of the winter snow pack still visible above the tree line.

An inspired scene such as this (complete with lobster, champagne and tiramisu) invites many thoughts. One wouldn’t, however, expect to be pondering the price of oil in such a place.

And yet that was the topic du jour for a well-to-do foursome seated near our table. All looked comfortably retired, with the casual air of Tahoe locals. With my brother off roaming in search of the dessert table, I couldn’t help overhearing their banter.

“It’s just crazy to think of oil over $100,” one snowy-haired gentleman said. “It will be interesting to see what happens when it goes to $150.”

“Yes,” the woman across from him agreed. “And my gosh, just think of what’s happening in the Middle East. With the presidential election coming up, there’s no telling what could happen next.”

They went on in that vein for another minute or two, which I found fascinating. Not so much for the content of the conversation, but rather the time, the place and the participants.

It’s long been the case that “normal” people don’t talk about this kind of thing. Big-picture thinking has always been something of a quirky pursuit. When someone brought up the gold standard in the poker room a few weeks ago, I thought it was a one-off… But if two data points make a trend, perhaps the public is waking up.

I had some further thoughts on the implications of $100 oil — what it means, where to look for profit, and so on — but Adam Lass beat me to the punch in his excellent piece below.

Adam does a great job pointing out the folly of the pundits who rejoice in oil’s short-term pullback (a topic we touched on recently, but which benefits from further exploration). Better still, Adam lays out the case for why $100 oil “changes everything.” Take a look.

Warm Regards,

JL

$100 Oil Still Changes Everything

by Adam Lass, Senior Editor, WaveStrength Options Weekly

“Oil is falling, oil is falling!”

So what?

Oh, it’s true enough by and of itself. Over the past few trading sessions, we have indeed seen crude oil futures fall some $11 off the all-time high of $135.09 a barrel set a fortnight back.

It’s almost comical how the all the Wall Street analysts and their talking-head stooges are tripping over each other to point out this new record low. Why, this is the lowest price since May 15!

Don’t Celebrate Just Yet…

But don’t break out that bottle of cold duck you’ve had stashed in the back of the company fridge just yet. Because in this case, “down” is definitely a relative concept. And the reasons for even this modest drop may be nothing to cheer about.

Two years back, if a pundit wanted to throw out a real bomb, he or she would predict $100 oil. Everyone would gasp at the sheer audacity or mere stupidity of such a claim. Didn’t they know that the price supply and price demand curves would prevent that from ever happening?

You see, there are several things that are supposed to happen when oil prices climb. First of all, the supply of oil magically increases.

Marginal Oil Goes Mainstream

In reality, it isn’t quite that simple. Much trumpeted “alternative” oil sources aren’t quite as magical as commonly assumed. Different crude oil sources have radically different prices associated with extracting them and making use of them.

When a fresh field is so ripe that the oil simply oozes up out of the ground, the cost to deliver to market is pretty darned cheap. Work that field’s reserves down for 20 years or so, and now you must (at great cost) pump in water and steam in order to get half of what you used to scoop up with a child’s sand bucket. And when those easy to find reserves are clapped out, you must look farther and farther afield to find ever more expensive fresh supplies.

Modern geophysical science can guide us to more raw oil then ever before. So after a fashion, the supply appears theoretically elastic (at least within our lifetimes). Marginal crude that would have been unprofitable to fetch out when the cost of crude was a mere $50 a barrel, becomes intriguing at $65 and damned attractive at $75.

Today, we begin ab ova, as the Romans say – with the egg.

The price of eggs has gone up 30% in the last 12 months. Why the big increase? Because the things that go into making an egg have gone way up – feed for the chickens, heat, light, and transportation.

As the egg goes, so goes the chicken…and the whole chain of consumer products that make up our cost of living. Everything is going up.

If we were looking for something to blame, we could turn to the price of oil. It was only $80 a barrel as recently as last summer. This morning, it is trading at $127 a barrel – near an all-time record, even in inflation-adjusted terms.

Modern economies run on petroleum products. As oil has gone up…so has everything connected to it. But as the oil price rises, it sets in motion a whole contraption of actions and reactions. As the price of a gallon of gas rolls up a penny, it tips over a little cup in which there is a steel ball. The little ball rolls down a track, trips a number of levers and switches, and runs into another ball attached to a string, which then swings over to the left and knocks over a glass of water, which falls down onto a tray of fast-growing ivy seeds, which send out shoots and vines and strangle the entire apparatus.

Well…you get the point: one thing leads to another…

And one thing that high oil prices lead to is higher prices for everything else. And higher prices lead to less purchasing power on the part of the average consumer, which leads to fewer sales, which leads to less output, which leads to lower earnings and slower growth…etc. etc.

This has put the airline industry is in “desperate” condition, reports the New York Times . Fuel is the airlines’ biggest expense. As it has gone up, airlines’ profit margins have gone down.

The latest report from the manufacturing sector show declining factory orders for four months in a row. And USA Today reports that many people are seeing declines in their incomes – in ways that don’t show up in the employment numbers. While the unemployment figures show little contraction, sales commissions, tips, and even Wall Street bonuses are going down fast.

Foreclosures are still rising nationwide, says the Wall Street Journal . The famous Foreclosure Bus Tours have now moved beyond hard-hit cities in Nevada and California; now there’s one touring the New York area!

Forbes has a word for all this: Stagflation. Of course, it’s not a very original word, but Forbes is not a very original magazine. But it’s not a new situation either, says the magazine. Stagflation is the devil’s child you get from the unnatural union of consumer price inflation and a stagnant economy. It’s also what the United States endured in the 1970s…the last time oil prices were so high. The price of gasoline rose during the late ’70s…and hit a record high, adjusted to today’s dollars, over $3 at the beginning of the ’80s. For all the whining about it, today’s gasoline is not much higher. But by 1981, the price of fuel was headed down. Over the next four years it fell in half…and stayed low until George W. Bush invaded Iraq.

Are we enjoying a re-run of a ’70s show? Is it time to get out the strobe lights and the leisure suits? Should we repaint the house in ’70s style slime green and dirty-carpet beige? Can we forget about trading in the SUV or putting in a wood stove? Won’t this whole thing blow over – the way it did in the ’70s?

George Soros says the bubble in commodity prices will burst. We believe him. So, can we stop worrying about high oil prices and rising inflation?

Not so fast, says Paul Krugman. This ain’t the ’70s because we don’t have the same kind of inflation, he points out. At the end of the ’70s, everyone was sure prices would continue to go up. In May of ’81, the United Mineworkers Union was able to negotiate a 33% pay raise spread over three years. The miners thought they needed the increase to make up for increases in the cost of living. And the mine owners thought they could afford it – because the price of coal had been going up for many years. They were both wrong.

But that was “wage-push” inflation, Krugman maintains, very different from what we have today.

Yes, he is right. This is a different kind of inflation…a different kind of stagflation…and, we predict, a story with a different kind of ending.

Stay tuned…

*** How will the story turn out?

Well, we repeat ourselves, what ultimately turned the situation around at the end of the ’70s was a change in regime at the Fed…the worst recession since the ’30s…and a whipsaw on Wall Street that whacked both the bond market and then the stock market, wiping out more than half the value of each of them.

At the end of the ’70s, the jig was up. When everyone had come to expect more inflation from the Fed, the central bank no longer saw any benefit in it. Its new money and credit was being anticipated and absorbed – in wage and price increases – even faster than they made it available. Inflation no longer worked, in other words. It no longer deceived businessmen into thinking they should expand production. It no longer deceived investors into believing their assets were going up in value. And even the lumpen householders had caught onto the game; as soon as they got a wage increase, they spent it quickly…and then demanded another one.

The feds didn’t have much choice. They could either inflate much more heavily than expected and wait for the disaster to catch up to them…or they could admit that the flimflam no longer worked, raise rates, and squeeze the “inflationary expectations” out of the system. Paul Volcker took the latter course. That, combined with the natural feedback look of the oil cycle – in which higher prices drew forth new supplies, as they always do – sent the price of oil back down. In today’s dollars, a gallon of gasoline sold for about $1.50 from 1986 until 2003.

Volcker’s anti-inflation Fed also knocked the price of gold down from over $800 in 1980 to around $275 in 1998.

(It was at this point that the then-chancellor, now-Prime Minister of England, Gordon Brown, decided to sell tons of Britain’s gold. It is why the low point in the gold market, set in the late ’90s, is still known as the “Brown bottom.”)

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.

Silverjet, which never made a profit in 16 months, was the last of three business-class only operators flying between London and the U.S. following the bankruptcy of Eos Airlines and MAXjet Airways Inc. More than a dozen carriers have collapsed in the past six months after the price of oil jumped 41 percent. The industry may report $40 billion in combined losses this year, more than three times the level after the Sept. 11 terrorist attacks, according to independent airline analyst Chris Tarry.

Oil is trading near $127 a barrel, compared with about $55 when Silverjet started flying on Jan. 25, 2007. Higher fuel expenses have contributed to the collapse of other airlines in recent weeks, including long-haul budget carrier Oasis Hong Kong Airlines Ltd., Columbus, Ohio-based Skybus Airlines Inc. and Frontier Airlines Holdings Inc. of Denver. Carriers everywhere are seeking to cut costs and some have begun charging for items such as snacks and checked luggage.

Despite the problems facing airlines, the US Dow Jones Transportation Average is soaring, says Martin Denholm in The Smart Profits Report.

“With the index made up of airlines like American (NYSE: AMR), Continental (NYSE: CAL), JetBlue (Nasdaq: JBLU) and Southwest (NYSE: LUV), plus shipping companies FedEx (NYSE: FDX) and UPS (NYSE: UPS) – all of which are buckling under the weight of high oil and gas prices – economists are now hotly debating whether it’s throwing the market a curveball.

“Traditionally seen as a sign of US economic strength and turnarounds, the fact that the index is soaring while consumers and the economy are struggling is a source of confusion … Oil prices and the Dow Transports usually move in opposite directions – and you’d think that with fuel being the biggest expense for Transportation Index companies and high oil prices pressuring so many areas of the transportation sector, the index that represents these firms would also be under severe pressure.

“Against the odds, the Dow Transportation Index is one of the market’s best performers, with some of the companies within it still going strong. Choose wisely and you could grab profits from a sector that many investors wouldn’t even consider at the moment.”