The airline industry has been stuck on the tarmac this year, but the sector-related exchange traded fund could take off as profits soar on revenue growth and lower input costs.
“S&P Capital IQ thinks that airline execs have learned from past costly mistakes on adding too much capacity and forecasts 2015 as a record profitability year, driven by revenue growth and the benefits of lower oil prices,” Todd Rosenbluth, director of ETF research for S&P Capital IQ, said in a research note.
The U.S. Global Jets ETF (NYSEArca: JETS), which tracks players in the global airline industry, can be a good way to track a more profitably second half of the year for airliners. S&P Capital IQ analysts have also placed an overweight rating on JETS.
Alternatively, investors can also gain exposure to the sector through transportation-related funds. The iShares Transportation Average ETF (NYSEArca: IYT) includes a 17.7% tilt toward airlines and the SPDR S&P Transportation ETF (NYSEArca: XTN) includes 25.6% position in the industry.
Jim Corridore, an S&P Capital IQ equity analyst, points out that years of consolidation, bankruptcies and capacity adjustments have bolstered airlines’ pricing power, which, in turn, has helped companies generate greater revenue. A raise in airfare and increased mix of business travelers who typically pay more for tickets have also added to revenue growth. Additionally, passenger load, a measure of how booked flights are, is at record levels.
So far this year, investors may have been worried about airliners adding too much capacity too quickly, without the necessary bump in passenger load to justify the increased cost. For instance, Delta (NYSE: DAL) is projected to add 4% to 6% capacity this year and see a 1 percentage point dip in passenger load factor. JetBlue (NYSE: JBLU) is expected to experience 8% capacity growth and a 1% increase in passenger load factor.
Oil prices can significantly weigh on a company’s bottom line, with U.S. airliners consuming 19 to 20 billion gallons of jet fuel per year. However, U.S. airlines have cut costs by nearly 50% year-over-year as oil prices tumbled to $50 per barrel.
Consequently, S&P Capital IQ believes many airliners, including DAL and JBLU, will experience rising revenue this year as companies capitalize off the lower energy prices.
U.S. Global Jets ETF
For more information on the airline industry, visit our airlines category.
Max Chen contributed to this article.