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!

And you know what? The rancor you may receive along the way is actually a good thing – as I’ve discovered at first-hand. When I wrote for TheStreet.com, the more hostility I encountered from readers, it usually meant that I was on the right track.

For example, during the height of the real estate boom, I recommended shorting Florida homebuilder and landowner St. Joe Company (NYSE: JOE). You should have seen the reaction I received! I got so much hate mail (and even a few threats) that I was sure it was a slam-dunk. It was. Within months of my column, JOE shares plunged about 50%.

I’ve enjoyed many calls like that over my career. But this one could be the most ambitious and optimistic one yet.

That’s because if there is one market industry that is so unpopular and so universally hated right now that you’ll probably think I’ve lost my mind to even suggest that it can bounce back. Can you guess what it is?

Ladies And Gentlemen… Welcome Aboard As We “Struggle For Survival”

I believe you need to keep your eyes on the airlines.

There… I said it.

I can imagine the incredulous look on your face at the moment – and I can understand why. Let’s deal with the bad news first…

The biggest and most obvious pressure right now is oil sitting at $126 a barrefl. Jet fuel has soared 50% since January alone and it doesn’t take a rocket scientist to know that this is disastrous for the long-term health of the industry. On Monday, chief executive of the International Air Transport Association (IATA), Giovanni Bisignani said, “The situation is desperate” and the entire industry is “struggling for survival.”

Already, 24 airlines have folded since the start of the year, with Britain’s business class-only airline, Silverjet, becoming the latest victim on May 30.

The group says the airline industry’s fuel bill will soar by $40 billion this year to a total of $176 billion. If oil prices edge back towards the record of $135 a couple of weeks ago and continue to trade there, it says that would turn the industry’s $5.6 billion in profit last year into a $6.1 billion loss. However, if oil drops back to $107 a barrel, that loss would “only” be $2.3 billion. But no matter what the price is, the problem is compounded by the weak economy and soaring consumer costs.

For sure, the industry is praying that oil is not just taking another temporary breather at the moment on the way to $200 (as some economists believe).

That’s the bad news. Now let’s look at the other side…

The “Nickel And Diming” Continues… But Planes Are Still Packed

Have you flown lately?

As I write, I just arrived in Lake Tahoe, where I’m speaking at an investment conference after another long plane ride from Florida.

I’ve been on an airplane at least once a month (and usually more) for the past year. But despite all the gloom and doom projections, I can’t remember the last time I had a vacant seat next to me. In fact, I can’t remember ever seeing many empty seats at all.

With record high oil prices squeezing profit margins, airlines are figuring out new ways to maximize revenue.

Many have imposed passenger fuel surcharges, which are increasing in line with oil prices (just today, British Airways’ latest surcharge increase came into effect – the 11^th time the airline has hiked it). Some are now charging for checked bags, meals, even headsets.

While this “nickel and diming” approach doesn’t make customers happy, airlines know that many folks have no other choice. Sure, they can take Amtrak if they don’t like it – but that option is often unrealistic.

So while others may scoff, I’m going to ask whether it’s possible to profit from the airline industry…

A Two-Year Tale Of Woe… But Watch For “Basing”Take a look at the graphic below. It’s a two-year chart of the AMEX Airline Index ($XAL).

In a word: Awful. And just as I expected back in September.

In my September 25, 2007 column, when the index was trading in the mid 40s, I said:

“I expect the index to slip back to support at $40. But with oil prices rising in what is usually a quieter period for airlines before the busy holiday season, I wouldn’t be surprised if the index breaks that support level – particularly if the broader stock market (still under some pressure) turns south. In that case, we could see a serious selloff.”

Yep, I’d say so! I certainly don’t suggest that you try to “catch a falling knife” here. However, don’t forget that the market is a forward-looking mechanism. This means that if stocks are rising (or simply stop falling) during a recession, it’s because the market is projecting a recovery.

Keep an eye on the XAL chart. Should the index “base” (stop going down and then flatline), or even reverse the downtrend and head higher, the market is likely signaling a recovery.

I wouldn’t necessarily get into airline stocks for the long term, as I believe the business model is flawed, but an intermediate-term trade seems quite reasonable once the bleeding stops.

And if you’re looking for a couple of the best individual companies (or at least ones whose charts don’t look as abysmal as their peers), check out Alaska Air Group (NYSE: ALK) and Southwest Airlines (NYSE: LUV). Keep them on your radar, as they could be early indicators for the broader sector’s recovery. At that point, you might be able to pick up some bargain basement airline stocks and turn it into a meaningful gain.

Buckle Up… The Seat Belt Sign Is OnI acknowledge that this call may be a bit early, but I want you to think about it now, so that when the time comes to act, you’ll be ready to pounce and know what to do, rather than considering the idea for the first time.

But be warned: Buckle your seatbelts and make sure your seat and tray-table are in the upright and locked position. The airline outlook is likely to be turbulent for a while longer. However, once it stops, the skies may be quite friendly to your portfolio.

Hoping your longs go up and your shorts go down.

Marc Lichtenfeld

Source: Can You Profit From the Market’s Worst Industry?