For all the controversy surrounding United Continental (NYSE: UAL) and the lethargic performances delivered by other big-name airlines to this year, the U.S. Global Jets ETF (NYSEArca: JETS), the only dedicated airline industry-related ETF on the market, is still up nearly 6% year-to-date.
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.
Speaking at the 2017 Sohn Conference, Brad Gerstner, Founder and CEO of Altimeter Capital, noted “how much more profitable airlines are today relative to where they were before the financial crisis. The reason: Consolidation. Airlines now have pricing power, something that they haven’t had for much of their existence, Gerstner says. As a result, they could close half the valuation gap with other industrials,” reports Ben Levisohn for Barron’s.
There are encouraging fundamental factors for airlines, including low oil prices. Fuel is the largest input cost for airlines. The improving U.S. economy could encourage more business and leisure travel and airlines are generating impressive amounts of cash.
Airlines’ impressive ability to generate cash is one reason Warren Buffett shook off his long-standing aversion to the sector and recently unveiled stakes in several of the top holdings in JETS.
Gertsner is bullish on the recently controversial United, one of the largest holdings in JETS.
“So why United? Because they have the best fleet and network in the business, Gerstner says, but the worst margins, which leaves lots of room for improvements. The company also has the ability to deliver the balance sheet while continuing to spend on capex and buybacks. The end result: A much higher stock price (perhaps over $200 at the high end of the range, Gerstner said),” according to Barron’s.
Even Buffett called airlines “cattle cars,” noting that when passengers prioritize price, comfort and other amenities often go by the wayside. Recently, American Airlines (NASDAQ: AAL), another one of the largest holdings in JETS, said it is reducing coach class legroom.
For more information on airline ETFs, visit our Airline category.