While the airline industry and related transportation exchange traded funds have benefited from cheap oil prices, rising energy costs could dampen the rosy outlook.
There are currently no airline-specific ETFs on the market, but investors can still gain exposure to the sub-sector through transportation funds. Fo r instance, airlines makes up 16.5% of the iShares Transportation Average ETF (NYSEArca: IYT) and 25.9% of the SPDR S&P Transportation ETF (NYSEArca: XTN). [Transportation ETFs: Airlines Landing on Higher Profits]
Additionally, the airline sector also accounts for 15.9% of the PowerShares DWA Consumer Cyclicals Momentum Portfolio (NYSEArca: PEZ), which includes six airline companies, with Alaska Air (NYSE: ALK) and American Airlines (NYSE: AAL) among its top ten holdings.
JPMorgan has revised their airline models due to recent traffic and guidance releases, according to a note. The analysts are lowering estimates on a number of airlines due to rising fuel costs.
For instance, JPMorgan expects American Airlines to generate pretax margins of 12% to 14%, from their original 13% to 15% rainge and fuel costs of $1.9 for 2016 resulting in an earnings-per-share of $10.89, down from the original $11.81 estimate. Alaska Air raised its first-quarter fuel assumption to $1.99 from $1.97. The fuel estimates for United Continental Holdings (NYSE: UAL) were raised and revenue per available seat mile was cut due to foreign exchange tailwinds. Additionally, the analysts diminished estimates for Southwest Airline (NYSE: LUV) due to the revised fiscal year fuel guidance.
However, Delta Air Lines (NYSE: DAL) fuel estimates were lowered to $2.35 from $2.4, raising the company’s earnings per share outlook.
Looking at the related ETF holdings, IYT includes 4.6% ALK, 4.5% UAL, 3.1% LUV and 3.1% DAL. XTN follows a slightly more equal-weight methodology, allocating 2.8% ALK, 2.5% AAL, 2.4% UAL, 2.5% LUV and 2.2% DAL. PEZ tracks 3.8% ALK, 3.8% AAL and 2.8% LUV, 2.6% DAL.
American Airlines has also recently jumped after a it was announced that the airliner would replace Allergan in the S&P 500, reports Terry Maxon for Dallas News. JPMorgan airline analyst Jamie Baker argued that the addition of American Airlines to the index could raise demand for the stock, especially from index funds that mimic the S&P 500.
iShares Transportation Average ETF
For more information on the airline industry, visit our airlines category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of IYT.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.