The global airline industry is trading at cheap valuations relative to the broader market and could take off as carriers increase efficiency to lower costs and more people around the globe travel abroad.
On the recent webcast, Why Airline stocks May Still Have Room to Fly: It’s Not Just About Oil, Helane Becker, managing director for Cowen and Company, pointed out that the U.S. airline industry remains strong and is growing as the economy continues to expand. Specifically, for every 1 point gain in the U.S. gross domestic product, airline traffic growth rises about a 1.5 points. [Exploring ETF Opportunity in the Friendly Skies]
For international, or non-U.S. airlines, the U.S.-dollar-denominated costs are a major concern as it makes up 30% to 40% of costs. Consequently, more overseas airlines are adding capacity to the U.S.
The industry is also enjoying lower costs as oil prices have dropped significantly over the past year. International airliners, though, are not seeing the same level of savings as U.S. airlines, since jet fuel is dollar denominated.
“Margins are up versus a year ago primarily because oil prices are down 40%,” Becker said. “So that has a positive effect on margins.”
However, there are some other cost considerations. For instance, regulatory changes and pilot rules are causing a pilot shortage, which may raise labor costs.
Airline stocks have been volatile, but Becker likes the idea of a broad global airline ETF, the U.S. Global Jets ETF (NYSEArca: JETS), as a way for investors to diversify into the space without being overexposed to any single stocks. For example, JETS’s top holdings include Delta Airlines (NYSE: DAL) 12.2%, Southwest Airlines (NYSE: LUV) 10.2%, United Continental (NYSE: UAL) 10.2%, American Airlines (NasdaqGS: AAL) 10.11% and JetBlue (NasdaqGS: JBLU) 4.5%.
Frank Holmes, CEO and CIO of U.S. Global Investors, also pointed out that airline stocks are relatively cheap, compared to the overall market. For instance, DAL is trading at a forward price-to-earnings of 7.6%, LUV shows 9.4 P/E, UAL has a 4.8 P/E, AAL trades at a 10.5 P/E and JBLU has a 10.7 P/E. The JETS portfolio shows a 11.7 price-to-earnings. [Fly Into an Inexpensive Industry With a New ETF]
Holmes also pointed to a number of factors that have contributed to increased efficiencies in the airline industry. Airline companies have increased seat capacity on planes and lowered breakeven costs. The industry has added thinner seats and more rows. Planes are becoming more fuel efficient, which has added to lower oil costs. Adoption of technologies and online services have helped streamline the whole flying process and boosted profitability. Additionally, even improved baggage handling has helped cut $18 billion in costs per year.
Moreover, the growing global economy and rising middle class in the emerging markets have contributed to increased travel demand. Global carriers project net profit to increase to $25 billion in 2015, up 25% from 2014.
JETS also includes some foreign exposure. While the U.S. still makes up a large portion of JETS’s portfolio at 76.4%, other country weights include Canada 3.6%, U.K. 3.4%, China 3.0%, Mexico 2.5%, Ireland 2.3%, Hong Kong 1.6%, New Zealand 1.4%, Japan 1.2%, Germany 1.1%, Greece 1.1%, Panama 1.0% and Turkey 0.5%.
Financial advisors who are interested in learning more about the airline industry can listen to the webcast here on demand.