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Jet-Airplane-iStock_000002633449XSmall-300x199Reports of the airline industry’s surging passenger revenue for December 2013  put an exclamation point on the end of a very profitable year for airline stocks.

The potential for more upside for airline stocks is great, but buyers beware: Higher profits may already be baked in the cake for some airlines. Plus, with high valuations having crept into the equation, buying may subside and more investors may take profits in the near term.

That could create tremendous buying opportunities.  Still, I  think investors need to come back down to earth and remember how fragile airline stocks really are. Should oil prices rise higher than 2012 levels, terrorism rear its ugly head or travelers shut their wallets, the industry is entirely capable of taking a nosedive.

It may involve one or two airlines, or it could be an entire fleet. Those are the inherent risks associated with this sector.

As a whole, the International Air Transport Association (IATA) projects a growth in net profit for the industry to $19.7 billion in 2014, up from $12.9 in 2013, based on four specific drivers:

  •  Economic cycle: Global GDP for 2014 is expected to expand by 2.7% in 2014 in developed countries but stagnation will continue in the BRIC nations.
  •  Passenger demand: Passenger demand may grow by 6%. However, stiff competition is likely to cause industrywide yields to fall by 0.6% in 2014.
  • Ancillary revenues: Airlines are benefitting from all those extra fees for checked bags, food and perks.  On a worldwide basis, each passenger brings in extra revenue of $13 as opposed to $5.94 without the extra purchases. In fact, airlines would be experiencing losses from core seat and cargo products without it.
  • Mergers: Consolidation has made the most progress in North American airlines, which explains their largest anticipated profits and best margins this year. Struggling European airlines should improve due to successful joint ventures over the North Atlantic.

Here are three U.S. airlines that will  continue to soar in 2014:

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