Airline industry and sector-related exchange traded funds could hit some headwinds as a strong dollar, rising overseas capacity and fuel prices could impede their path.
Michael Linenberg, an analyst with Deutsche Bank, lowered his outlook on American Airlines (NYSE: AAL), Delta Air Lines (NYSE: DAL) and United Continental Holding (NYSE: UAL), Financial Times reports.
While there are no airline-specific ETFs on the market, investors can gain exposure to the sector through transportation-related funds. The iShares Transportation Average ETF (NYSEArca: IYT) includes a 17.0% weight toward airlines, with 3.2% in DAL and 4.7% UAL. The SPDR S&P Transportation ETF (NYSEArca: XTN) includes 27.8% in airlines, with 2.6% in AAL, 2.4% in DAL and 2.4% in UAL.
Airline stocks plunged on Deutsche’s negative assessment Wednesday. For instance, AAL, decreased 4.8%, DAL declined 4.0% and UAL fell 5.0%.
Meanwhile, IYT dipped 0.9% and is now testing its 200-day simple moving average while and XTN pulled back 1.7%. Year-to-date, IYT is down 4.3% and XTN is 1.9% lower.
“The combination of a strong US dollar, greater-than-expected capacity increases by non-US airlines and decelerating global GDP growth are likely to further pressure our negative 5 per cent international [passenger revenue]forecast for 2015,” Linenberg said in the FT article.
Additionally, while oil prices have plunged since last year, recent volatility could also weigh on U.S. and international carriers. Jet fuel prices are a major cost component among airlines, with every $1 rise in jet fuel prices translating to a $400 million decline in the U.S. airline industry’s pre-tax profits. [Fuel Costs Could Cause Airline-Related ETFs Some Turbulence]
Nevertheless, the analyst notes that the negative outlook is only near-term in nature as Deutsche Bank maintains a bullish stance for carriers on the long-run, pointing to strong free cash flows, reports Martin Blanc for BidnessETC.
Linenberg argues that the U.S. airline industry is on track to report record profits and free cahs flow for the year despite international market pressures, but he warned that profits will probably not be as high as previously expected.
iShares Transportation Average ETF
For more information on the airline industry, visit our airlines category.
Max Chen contributed to this article.