Airline stocks and the U.S. Global Jets ETF (NYSEArca: JETS), the only dedicated airline industry-related ETF on the market, are struggling this year, but some industry analysts believe it could just be a matter of time before airline equities rebound.
Airline industry observers, though, should watch for potential rough patches ahead. For instance, oil prices have jumped almost 60% off their mid-February lows, which will increase jet fuel costs. Labor costs are increasing as employees demand higher wages and profit sharing. Airfares have dipped. Geographical risks, such as terror attacks and the Zika virus, have weighed on vacationers’ sentiment.
However, investors should keep a close eye on their calendars because JETS could rally as the summer season starts to wind down.
“The domestic yield environment is stabilizing. U.S. airlines generally noted that domestic close-in yields have stabilized since softening late June/early July, and reiterated their expectation that the fourth quarter will show quarter-over-quarter improvement in unit revenue (RASM) growth as capacity growth slows, exchange-rate headwinds subside and pricing actions lap. Airlines noted that September visibility is still low with less than 50% of the month booked; some expressed greater caution on off-peak (United Continental Holdings (UAL), Spirit Airlines (SAVE) than others (American Airlines Group (AAL), Delta Air Lines (DAL), Hawaiian Airlines (HA) while Southwest Airlines (LUV) fell somewhere in between,” according to a Credit Suisse note posted by Barron’s.
JETS follows the U.S. Global Jets Index, which uses fundamental screens to select airline companies, with an emphasis on domestic carriers, along with global aircraft manufacturers and airport companies.
Along with lower oil prices, airline stocks look attractive in their own right. For instance, income-oriented investors may notice that airline stocks have seen improved dividend-yield growth. Additionally, the sector shows relatively cheap valuations. Airline stocks have a 7 times price-to-earnings ratio, whereas the broader transportation stocks have a 15 times ratio and the S&P 500 index shows 17 times P/E.
SEE MORE: Airline ETF Flying High
“Among the majors, we sense investors are most interested in United Continental given the catalyst path including imminent leadership changes. American is also garnering more interest given positive commentary on Latin America and what seems to be a more confident tone on the unit revenue environment now that headwinds are lapping. Delta sentiment remains mixed as many question the achievability of the third-quarter passenger revenue per available seat mile (PRASM) guide given the level of improvement required in September,” adds Credit Suisse.
For more information on airline ETFs, visit our Airline category.
U.S. Global Jets ETF
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.