Aviation stocks 'won't fly high forever'

Aviation stocks are a good way to "rev up" a share portfolio but will never form the core of an investment strategy because of their volatility, according to analysts at an aviation conference.

The Australian aviation industry has enjoyed a sweet spot in recent months, with stable fuel prices, capacity constraints and rising passenger demand fuelling a surge in profit and share prices.

The Qantas share price, for example has almost doubled in the last year, from $2.95 last July to Monday's close of $5.80.

The airline also posted four profit upgrades through the course of the last financial year, the most recent one pointing to a full year pre-tax profit of over $1 billion.

And while Virgin Blue shares have shed more than fifty cents since April, they are still well up on the $1.60 range they were trading in a year ago, currently fetching about $2.24.

"They're actually making money and the main reason is capacity constraints," Deutsche Bank transport analyst Jason Bloom told the Asia Pacific Aviation Summit.

"The investor mix is changing as well. You have a lot more interest from the hedge funds as opposed to the long term equity funds.

"They're attracted to industries with high volatility."

The growth of the Chinese and Indian middle class augured well for Australian airlines, as did the increasing propensity of tourists to travel by air.

But percentage capacity growth was now into double digit figures, and the entry of new low cost entrants like Tiger Air would significantly decrease yields.

"There's no way the cycle's been killed off," said JP Morgan analyst Matthew Crowe.

"There are some structural changes, but I wouldn't say goodbye to the cycle."

Investors looking for exposure to the aviation market would be well advised to consider aircraft leasing companies, he said.

Both Mr Bloom and Commonwealth Bank transport analyst Cassandra Meagher agreed the industry would remain volatile.

"Basically, airlines have got big costs, they've got strong labor unions and they've got commodity prices and it's not a great recipe for success," Ms Meagher said.

Exposure to geo-political tensions or public health crises like the SARS epidemic also had to be considered.

"(American billionaire) Warren Buffet is an air-aholic and says he has a 1800 number to call anytime he's about to invest in an aviation stock," she said.

The two-day Asia Pacific Aviation Summit is being held in Sydney. Speakers include Tiger Airways chief executive Tony Davis, Jetstar boss Alan Joyce and Etihad chief James Hogan.