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If the recent global economic downturn has battered most industries, it knocked the airline business out cold. But now the industry is beginning to show signs of life again. “After a difficult year battling the recession, the airline industry appears to be headed toward a recovery as fuller planes, fewer discounted fares, lower fuel prices and revenue from a variety of formerly free services start to pay off,” writes Susan Carey.

Low-cost carriers focusing on domestic flights are already seeing undeniable signs of improvement. Southwest’s (NYSE:LUV) passenger miles and unite revenue, the money generated for each seat flown one mile, increased 12% last month from the same period a year ago.

Several large domestic airlines, including Delta (NYSE:DAL), American (AMR), and United (UAUA), saw year-over-year declines in November traffic, perhaps the result of both decreases in demand and cuts in capacity by airlines looking to establish a floor on prices.

The contraction in the industry has occurred at a remarkable pace, with the Air Transport Association reporting that U.S. airlines have eliminated 10% of seats flying between January 2008 and the schedules they have filed for January 2010. This year’s drop has taken capacity back to 1998 levels. Average fares are also hovering around late-90s levels.

Still, the outlook is overwhelmingly positive. Business travel, generally a high-margin activity for airlines, is on the upswing. A recent survey from the National Business Travel Association showed that nearly 70% of travel managers expect business travel volume to grow next year, and 56% project total spending will increase. Business travelers are much more likely to make “close-in” bookings, last minute reservations that generally come with higher fees. A recent $10 billion order from United gives further reasons to hope.

Airline ETF

For investors who think the airline industry’s turnaround may be sustainable, the Claymore/NYSE Arca Airline ETF (NYSEARCA:FAA) may be an interesting option. This fund invests in stocks of about 25 global airline companies, with major allocations given to Delta (16.8%), AMR Corp. (16.5%), and Southwest (14.3%). Other U.S.-listed companies such as US Airways Group (LCC) and UAL Corp. are included, as are international airlines like Lufthansa (OTCQX:DLAKY), Air France (AFLLY.PK), and Singapore Airlines (SPAAF.PK).

Since its inception in January, FAA has essentially served as a leveraged play on the broader domestic markets. The ETF lost nearly 40% of its value in the first six weeks of trading as the markets bottomed out, but has gained more than 100% since the March bear market lows.

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FAA

Disclosure: No positions at time of writing.