The airline industry has a long history of turning profits into losses. For decades, airlines were fond of adding planes and launching fare wars in an effort to boost market share, but that resulted in excess supply and mounting losses. Over the past three years, however, the US airline industry turned a corner as it merged itself into only four major US carriers…carefully controlled capacity…added many new fees…and boosted fares and, ultimately, profits. It did all of this so well, in fact, that the Justice Department is investigating whether several airlines illegally colluded to limit available seats. But it’s unlikely the investigation will result in charges because competition still is strong.

Investors soured on airline stocks this spring as airlines increased available seats and cut fares, thanks to forecasts of a strong economy and low oil prices. But the stocks, recently trading at bargain prices, are likely to rebound by the fall as companies cut back again on available seats, raise fares and add to their already record profits. Attractive airline stocks…

United Continental (UAL) was hurt by the rocky merger of United and Continental five years ago, but it has begun to overcome the stumbles and is showing great discipline in not adding too many flights or cutting fares.

Delta Airlines (DAL) has the least debt and the highest profits and dividends of the four major airlines (representing a 1.2% yield).

Southwest Airlines (LUV). A 1980s era law that restricted the number of flights from its home airport in Dallas has expired, so it plans to expand international flights enough to generate $3 billion to $5 billion in international revenue from nearly nothing today. Profits—and the share price—could double within a few years.

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