In “Is The Oil Rally Over?” (May 29) Joe Terranova told the Fast Money traders he’s playing oil by:

“I’m short Hess (HES) and I’m long Southwest Airlines (LUV), long the Canadian dollar and long one of the refiners,” he said.

In the models I use, Hess scores highly for earnings momentum and price momentum but poorly for free cash flow. Southwest Airlines gets high marks for earnings quality and free cash flow but scores low for return potential.

Disclosure: At the time of publication, William Trent has no financial position in the companies mentioned in this article.

We have said often that the future of passenger air travel lies in smaller jets flying to smaller cities. The hub and spoke model is outmoded, and large passenger jets are really only well suited for a few major city-pairs. Meanwhile, the freight market that would have helped to defray the costs (because air freight carriers really do need bigger aircraft) seems to remain tightly locked up.

A good example of the direction we see things going is evidenced by JetBlue’s (JBLU) current plans to offer nonstop service from Westchester County, New York.

The flights would begin in March, county officials said. Airport manager Peter Scherer said the airline is considering routines to Orlando, West Palm Beach and Chicago.

We have generally regarded this trend as positive for Brazilian regional jet manufacturer Embraer (ERJ). However, the current valuation may be a bit stretched if insiders are any indication.

Brazil’s Embraer share offering nearly doubles | Reuters.com

Brazilian aircraft maker Embraer said on Tuesday its proposed share offering will be about twice as large as planned because more of its shareholders decided to join the sale.Embraer, the world’s fourth largest commercial aircraft, said in a filing to Brazil’s securities regulator five of its shareholders will offer 72.9 million common shares. In a December filing, the company said two shareholders planned to offer 43.3 million shares.

With major shareholders all seeming to feel like this is a good time to lighten up, investors should probably be wary about buying right now.

Embraer (ERJ) reported a sales and profit decline due to production problems with the ramp up of its 190 and 195 aircraft. The issue caused deliveries to fall to 30 aircraft from 41 over the same period last year. Embraer had warned about the problem, cutting its delivery forecast for this year to 135 planes from 145. But it raised its 2007 delivery estimate to at least 160 from 150.

Because of the fact that it appears to be timing-related (and of much lower magnitude than the issues at Airbus (EADS) investors appear inclined to shrug off the problems. Over the long run, we think Embraer is sitting in the sweet spot between the large planes nobody will want to fly on and the smaller turboprop planes nobody wants to fly on.

We think it is only a matter of time before some carrier decides to create an uber-Southwest (LUV) and launch non-stop regional jet service between large markets and middle tier markets that currently require a connection on the hub-and-spoke model airlines. That could really result in a new order boost.