Investors who want to enhance their portfolio may look to the airline industry, explore strengthening fundamentals and consider ways for to diversify using an airline sector ETF strategy.
On the recent webcast (available On Demand for CE Credit), Your One-Way Ticket to Investing in Major Airlines, Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors, outlined a number of factors that could help support the airline industry outlook ahead. For example, there are 2 million people flying in the U.S. every day and almost 107,000 flights around the world. Looking at the global picture, an expanding middle class is expected to contribute to increased air travel, with an expected 4.2 billion global middle class in 2022 and 5.2 billion in 2028.
The airline industry also enjoys strong economic moats, or high barriers of entry in the domestic airline industry and massive hurdles to building new airports, which helps improve the competitive advantage of players in the game.
The global airline industry is expected to log another profitable year, generating $33.8 billion in net profits this year. While crude oil prices and jet fuel costs have increased, airlines continued to turn a profit and grow.
Bolstering airline industry profits, a number of ancillary or non-ticket revenue helped expand profit margins. Global airline ancillary revenue is projected to cross above $80 billion, or 10% of total revenue. Major U.S. airlines are raising checked-baggage fees, with American Airline recently announcing it will joining Delta, United and JetBlue in raising fees from $25 to $30 for first checked bags and from $35 to $40 for the second.
In addition, airlines are working in conjunction with credit card companies, and the partnership has produced deals that has acted as a growing source of airline revenues. Loyalty programs are now making up a large share of total revenue, contributing 15.3% for Southwest, 12.8% Alaska Air Group and 11.8% American Airlines, among others.
Airline Industry Growth in Capital
The industry has experienced increased return on invested capital. For instance, the U.S. Global Jets Index shows a 1-year return on invested capital of 12% and the New York Stock Exchange ARCA Airline Index shows a ROIC of 10%, compared to the S&P 500’s 5% ROIC.
Free cash flow among domestic airlines are also experiencing their greatest increase in years.
Additionally, yield growth among airline companies is on the rise, with the New York Stock Exchange ARCA Airline Index showing a 1-year dividend yield growth of 40.24%, compared to the Dow Jones Transportation Index’s 1-year dividend yield growth of -0.25%.
Value investors may also notice that the New York Stock Exchange ARCA Airline Index is trading at a relatively cheap 13x price-to-earnings, compared to 18x for the Dow Jones Transportation Index and 20x for the S&P 500 as of the end of July 2018.
As a way to gain exposure to the airline industry, investors can look to the U.S. Global Jets ETF (NYSEArca: JETS), the lone ETF dedicated to airline stocks, to access the growth opportunity. 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.
JETS is not a pure play on airlines as it is slightly diversified into aircraft manufacturers and airports & terminal services or infrastructure. The ETF also includes global exposure to North and South Americas, Europe, Asia and Australia.
Financial advisors who are interested in learning more about the airline industry can watch the webcast here on demand.