Is There Any Reason Why Investors Should Still Own Airline Shares? (Well, Yes, Actually, There Is)

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Don’t say they didn’t warn you. Back in June 2006, the International Air Transport Association’s (IATA) chief economist told an Agence France-Presse reporter, “Oil prices of $100 a barrel or more are a possibility that would seriously threaten airlines.”

With oil now well above $100 a barrel, is there any reason why an investor would still want to own airline stocks? Well, yes, actually, there is – but only if you aren’t the sort who reaches for the barf bag when your flight encounters severe turbulence.

It’s inevitable that airlines will continue to suffer from record high jet fuel costs that can’t be passed through in the form of higher ticket prices. The question is, for how long? Paradoxically, the faster oil prices climb, the better it could be for the airlines. Yes, carriers will suffer, and some may not survive. But so great will be the political as well as economic pressure to find a substitute for oil-based jet fuel that it should accelerate development of an algae-based biofuel substitute that could actually enhance airlines’ profit potential.

Right now, experts aren’t expecting algae-based jet fuel to be in use for another 10 or so years. But if all of the world’s carriers are in imminent danger of shutting down, that timeline might shorten dramatically, perhaps down to just three years or even less. Really big companies with very deep pockets are quietly working on algae-based jet fuel, and when nations get scared to death of losing their airlines (which could happen shortly), governments may well throw big incentives at these companies to fast track their programs.

According to experts, algae is 100 times better at creating usable energy than corn. And there’s a lot of it around, with new techniques being developed to better cultivate and harvest it. Some believe algae is the only truly sustainable bio-energy source.

When their planes are flying on algae-based biofuel instead of oil-based jet fuel, not only should airlines’ fuel costs come down. Carriers could also see a new source of income. “It is hard to exaggerate the importance of emissions trading” to the airline industry, British Airways’ chief executive, Willie Walsh, was recently quoted as saying. While Walsh meant that airlines will need to buy emissions credits to offset the pollution generated by jet fuel, when planes are flying on algae-based jet fuel, carriers could become sellers of credits.

If you’ve got the stomach for it, owning airline stocks for the long term may be worth thinking about.

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