A Southwest flight was forced to make an emergency landing on April 17 when an engine suffered a mid-flight failure. Shrapnel from the engine failure penetrated the plane, causing the death of one passenger and seven others to be insured.

Another Southwest flight was diverted and forced to land on May 2 due to a cracked window.

#-ad_banner-#Surprisingly, shares fell just 2% after the first incident and were down only 1.5% on the day of the cracked window. That resilience in the face of what could have been a devastating day is little consolation for shareholders though against a 21% plunge from a multi-year peak reached in January.

In fact, the entire industry seems to have hit some major turbulence as of late with the U.S. Global Jets ETF (NYSE: JETS) off 8.8% since January.

Airline Stocks Are Falling From The Sky
As bad as two equipment problems in less than a month may seem, airline stocks are falling for a different reason.

The biggest burden on airlines has been the jump in jet fuel prices. The International Air Transport Association (IATA) reports North American fuel prices have jumped 47% in the year through April, rising roughly 10% so far this year.

Production cuts from OPEC suppliers have helped to offset growth in U.S. productions and oil prices have risen to a three-year high. Topping off strong demand from global growth, fears over the unraveling of the Iran nuclear agreement have traders on edge that energy prices could be heading higher.

That’s bad news for an industry that books a large part of its operating costs for fuel. The IATA forecasts fuel as a percentage of industry operating costs will rise to 20.5% this year from 18.8% in 2017.

Is Near-Term Weakness An Opportunity To Ride Airlines Higher?
Against the current pessimism on higher fuel costs, there’s reason to believe the worst is baked into shares.

Airlines were profitable with oil at $100 a barrel so it’s not so much the level of fuel costs but the speed of change. The sharp increase in the price of fuel meant that airlines haven’t been able to adjust ticket prices to pass along some of those costs to customers.

A competitive industry may limit how much costs can be passed through, but solid economic growth and consumer spending should allow a few companies with strong customer satisfaction records to increase profitability. The Bureau of Transportation Statistics reported that January revenue passenger miles were higher by 2.6% over the same period last year and available seat miles grew by 3.2%, meaning carriers were able to use efficiency gains to boost general growth.

Revenue freight ton miles for U.S. carriers jumped 7.4% in January on a year-over-year basis. Tightened regulations in trucking and a driver shortage may be benefiting air carriers in freight and economic growth around 3% this year means more freight to be shipped.

American Airlines (Nasdaq: AAL) is my top pick among the major carriers. Profitability took a big hit last year when wages were increased significantly and management has already acknowledged higher fuel prices with a cut to its earnings target for this year. Taking the wage hit last year should mean less pressure in 2018 and margins could surprise to the upside.

American Airlines has one of the newest fleets in the industry with an average fleet age of just 10.1 years. That could free up cash flow to be returned to shareholders and help the company improve its balance sheet.

Shares trade for just 8.6 times trailing earnings, one of the lowest in the industry, and analysts expect profits higher by 9% to $5.48 per share over the next four quarters. Despite slower passenger growth over the year through January, the company still commands the largest share of the market and a turnaround in profitability could drive strong results.

Southwest Airlines (NYSE: LUV) has one of the best records for customer satisfaction and that could help it weather the recent incidents. The company is one of the few to escape bankruptcy over the last few decades, posting 45-consecutive years of profitability. Southwest holds the second-highest share of the domestic market and has experienced strong passenger growth over the year through January.

Southwest has also recently modernized its fleet to an average fleet age of just 11 years. The modernization has helped increase average seats per aircraft and lowered operating costs with an increase in average seat miles (ASM) per gallon of 5% over the past five years.

The company has one of the strongest balance sheets in the industry and is one of only three major carriers with an investment-grade debt rating. Shares trade for 14.6 times trailing earnings which are expected 26% higher to $4.60 per share over the next year.

Delta Airlines (NYSE: DAL) has used a joint venture and equity stake business model to become No. 1 or No. 2 in eight of the 10 largest international markets for flights originating from the United States. A program of increased cabin segmentation from two categories to four (economy, main, comfort, premium) has increased revenue per passenger significantly.

Delta has turned its disciplined approach to capital investment into a cash machine for shareholders. The company returned $1.7 billion to investors through the share repurchase last year for a 4.6% cash yield on top of the 2.4% dividend yield.

Shares trade for 10.7 times, trailing earnings, which are expected to increase 30% to $6.34 per share over the next four quarters.

Risks To Consider: Rising fuel costs could continue to pressure airline stocks and there is headline risk around the Iran deal.

Action To Take: Worries over fuel costs might not be over for airlines but rising ticket prices and a solid economy should help shares rebound. Position in best-of-breed carriers on the short-term discount.

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