The coronavirus pandemic has weighed on global airline stocks and the sector-related exchange traded fund, but investors should consider the potential long-term benefits of entering the market during a recovery period.
In the recent webcast, Airlines Have Weathered Storms Before, Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors, pointed out that there has been heavy investment interest for airline stocks as the sector plunged into oversold territory last seen since 9/11. Holmes argued that airline stocks look attractive, with the NYSE Arca Global Airlines Index recently showing a record low 14-day RSI that reflected airline stocks traded at their most oversold since September 2001.
Airline stocks are also trading at attractive discounts to other segments. The New York Arca Airline Index showed a price-to-earnings of 5.7 as of the end of March, compared to the 14.5 P/E ratio for the S&P 500 Industrials Index, 20.1 P/E for the Dow Jones U.S. Trucking Index and 15.6 P/E for the Dow Jones U.S. Railroads Index.
Meanwhile, investors took a significant interest in airline stocks, trying to catch the bottom. Specifically, the U.S. Global Jets ETF (NYSEArca: JETS), the lone ETF dedicated to airline stocks, experienced 44 consecutive days of inflows ended May 5, adding over $600 million in net inflows over the period.
JETS may even be used as a tactical portfolio investment tool to capitalize on specific market views across short-term periods. U.S. Global has witnessed sophisticated traders shorting weaker names to potentially profit from underperformers while profiting from the long ETF, which would help reduce volatility for the pairs trade. For instance, traders have shorted Ryanair while holding long JETS, or shorting JETS and going long Spirit Airlines to place a view on individual names outperforming the basket of airlines.
Airline companies have exhibited a history of resilience, making a strong recovery after previous periods of uncertainty. For example, airline stocks advanced 80% in the six months after the 9/11 terror attack on the World Trade Center. The sector surged 120% in the six months after the SARS scare. Additionally, airline stocks returned 80% in the six months after the global financial crisis.
The airline industry also received more support to get back on its feet during the current crisis. The CARES Act included an aid package to strengthen the airline industry, with half in the form of grants to cover some 750,000 airline staff wages.
While passenger flights have drastically fallen, airliners have not been twiddling their thumbs. Passenger airlines have turned to cargo for revenue. A one-way charter for a full freighter can cost up to $1 million, or four times the rate pre-crisis. American Airlines used a Boeing 777 to carry medical supplies overseas – the first cargo flight in 36 years. Airbus also transported masks from China to Europe with a prototype A330-800 aircraft.
Americans are also returning to airports. TSA data reveals that people are flying again. After a low of 87,500 daily U.S. commercial air passengers on April 14, the number of daily passengers has steadily increased to March levels and continues to rise.
International travel is also recovering. According to Raymond James data, Chinese Google flight searches in May have begun to rebound.
As a way to access the global airline industry, investors can look to the targeted U.S. Global Jets ETF. 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.
The JETS portfolio follows a type of smart beta indexing methodology where the top 4 U.S. domestic airlines based on a ranking of market capitalization and load factor receive a weight of 12% each. The next 5 U.S. domestic airlines based on a ranking of market capitalization and load factor receive a weight of 4% each. A composite fundamental rank is calculated for the remaining U.S. airline industry companies, screening for cash flow, sales growth, gross margin, and sales where the top 4 securities based on this rank receive a 3% weight each. Lastly, a composite fundamental rank is calculated for foreign airline industry companies, screening for cash flow, sales growth, gross margin, and sales yield where the top 20 securities receive a 1% weight each.
Financial advisors who are interested in learning more about the airline sector can watch the webcast here on demand.