Airline stocks set to soar this summer as profits surprise

Airline stocks such as Delta and U.S. Airways are set to soar on better-than-expected earnings as consumer confidence increases, capacity continues to come offline and fuel costs remain tame.

"There are fewer of them now so they have pricing power and synergies which give them an EPS cushion, and they're hedged on fuel costs," said Stephanie Link, money manager and director of research at TheStreet.com.

Shares of Delta are already up 60 percent this year to lead the pack, while United is up 35 percent. U.S. Airways and Southwest are both up 30 percent for 2013. Those gains many continue this earnings season if history is any guide. The group is set to report two weeks from now.

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Delta's earnings exceed analysts' estimates 54 percent of the time, according to data compiled by Bespoke Investment Group. That beat causes the shares to jump 6 percent, on average, a week following earnings, Bespoke data shows.

U.S. Airwarys exceeds the consensus view 94 percent of the time, causing its shares to jump an average of 4 percent following its report. Southwest and United also beat estimates a majority of the time.

"Easier comps and a subdued capacity backdrop position the industry to lift ticket prices in the back half of 2013," wrote Daniel McKenzie of Buckingham Research Group. He sees the shares catching a headwind this Fall in anticipation of higher margins next year.

In five years, the industry has done away with 21 million domestic seats, equaling a 9 percent capacity reduction, according to Buckingham.

This combined with higher prices and fees for ancillary services like baggage will lead to higher margins, investors said.

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Link favors Southwest because of AirTran, an airline it purchased two years ago. In March of this year, Southwest had fully integrated its domestic booking and other services with the carrier, but has yet to add the ability to seamless book connecting flights to AirTran's international routes. That should come by 2014.

Jet fuel prices have held steady since April and are way off their highs to start the year. Both production and demand are at their highest in almost a year, according to data from the Energy Information Administration released last month.

Non-farm payrolls increased by a better-than-expected 195,000 in June we learned earlier this month, feeding the sense that the U.S. consumer is growing more confident. The official consumer confidence report for June from the Conference Board came in much better than expected.

"Companies look cheap relative to current earnings, which may draw in investors looking for low P/Es," noted Michael Khouw, the primary strategist with DASH Financial.

But Khouw cautions that there hasn't been a major labor dispute in a while and that gives him pause because the industry has been plagued by those problems before, especially when they started banking large profits.

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This harkens back to the old view of airlines, though.

"Men as smart as myself have gotten their asses handed to them on a sling with the airlines," said the fictional Gordon Gekko in "Wall Street." "Fuel could go up. Unions are killers."

These aren't Gordon Gekko's airlines.

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