Some Air-Transport Stocks Have Been Able to Take Off

You think you've got troubles? Try operating an airline.

Flying large numbers of people from one place to another requires big, expensive capital equipment -- not to mention a vast workforce of pilots, flight attendants, baggage handlers and so forth.

All the while, you must deal with wildly volatile fuel costs that put you at the mercy of the world oil markets. Good luck passing on all your rising costs to your customers in a marketplace of fierce fare competition.

Those customers carry with them a long list of complaints and dissatisfactions, quite a few of them justified. You lost their luggage. Your delays caused them to miss a connecting flight. They hated the complimentary food you used to feed them and think it has actually gotten worse since you started charging extra for it.

In the mists of distant memory there was a time, around 1967, when commercial airplane travel had a glamorous image. Today, such travel is basically buses with wings.

So when investors go looking for promising growth businesses on which to risk their money, air transport makes an easy throw-out. But in the always mysterious world of investing, the actual story isn't so simple.

Wonder of wonders, the Russell 3000 Air Transport Industry Index, comprising 21 stocks, climbed 35 percent in the year ended in April. That showing more than doubled the 15 percent gain posted by the Standard & Poor's 500-stock index.

Over the past five years through April, according to Bloomberg, the air transport index boasts a gain of 5.1 percent per year, compared with the S&P 500's rise of 2.7 percent annualized.

Very few mutual funds specialize in this sector of the market, and the ones that do are small. So it's interesting to see how well the best known of these, the $156 million Fidelity Select Air Transportation portfolio (FSAIX), has performed. Bloomberg data show it with a 47 percent gain over the past 12 months and a 7.1 percent-a-year return since the end of April 2001.

The fund has evidently helped itself by downplaying conventional passenger carriers. The latest reports show only one carrier, Southwest Airlines Co., among the fund's 10 largest holdings, and airline stocks as a group make up just 23 percent of the total portfolio.

The emphasis goes instead to aerospace manufacturers such as Rockwell Collins Inc., Boeing Co. and United Technologies Corp. A Portland, Ore., producer of components, Precision Castparts Corp., has made a nice contribution to the fund's recent performance, having climbed 72 percent in the past12 months.

At last report, Select Air Transportation's biggest holding was Expeditors International of Washington Inc., a Seattle freight forwarder whose shares sport a gain of 75 percent for the past 12 months and a five-year return of 28 percent annualized. The stock jumped still higher in early May when the company reported earnings that beat estimates.

FedEx Corp., another Top 10 holding that ships parcels rather than people, has gained 23 percent a year since April 2001.

Like all specialized sector funds, Select Air Transportation is low on broad multi-industry diversification to cushion it from risk. If the progress of the world economy stumbles over some obstacle such as rising interest rates, this fund could hit some nasty turbulence.

So it may be best suited for activist investors who have the time and inclination to keep a close eye on risk in their individual holdings. Those investors, of course, have the choice of many other ways to play the worldwide economic boom.

That may help to explain why air-transport sector funds aren't a bigger presence on the global investment scene.

In its own modest way, however, Select Air Transportation is well worth the time we have just spent scrutinizing it. In a business such as air transport, where yesterday's titan can be today's bankruptcy filer, the package-of-stocks approach provided by a fund can make a lot of sense.

The stock market nowadays is full of impressive beneath-the-headlines stories like this one. If nothing else, they make a strong anecdotal case for not giving up on the idea of active fund management just yet.