Investors may find cheap valuations and improved fundamentals in the airline industry and sector-related exchange traded fund.
On the recent webcast, Why Airlines Have Been Soaring to Record Profits, Frank Holmes, CEO and Chief Investment Officer at U.S. Global Investors, argues that the airline industry could fly as many economic factors continue to bolster the growth outlook and investors can gain exposure to the cheap sector through a targeted ETF.
Over the past year, airline stocks have been moving as oil prices tanked. Fuel is the largest expense for airlines, which makes the sector sensitive to swings in the energy market. [Oil ETFs Plunge to All-Time Lows]
Looking ahead, Holmes argues that a number of other factors could further support the sector. For instance, the aviation sector is expected to contribute $1 trillion to world GDP by 2026.
The growing global economy could support overseas growth opportunities. Specifically, the rising middle class in the emerging markets will fuel more air travel demand. The global middle class is expected to hit 3.2 billion in 2020 and 4.9 billion in 2013, compared to 1.8 billion in 2009.
A dearth in supply and rising demand could also help support better pricing for airliners. Holmes points out that the industry has been consolidating due to businesses closing and greater merger and acquisition activity, which will cause fewer flights. As airliners see increased capacity, many companies have been trying to expand fleets, with Boeing (NYSE: BA) showing a 7-year production backlog for jets. Meanwhile, the industry, for better or worse, added thinner seats, which has increased overall capacity and bolstered revenue.
Airlines are also paying down debt while free cash flow is rising. Debt as a percentage of operating revenues has declined to 41.4% in 2014 from over 65% in 2010. Free cash flow is expected to rise over $15 billion this year from close to zero over the past couple of years.