Oil prices jumped last week after the U.S. executed a strike to kill despot Iranian Major-General Qassem Soleimani. Rising crude prices are often a headwind to airline equities and that was the case last week as the US Global Jets ETF (NYSEArca: JETS) lost 2.75%.
JETS seeks to track the performance of the U.S. Global Jets Index, which is composed of the exchange-listed common stock (or depository receipts) of U.S. and international passenger airlines, aircraft manufacturers, airports, and terminal services companies across the globe.
Although now may seem like an appropriate time to avoid airline stocks, some market observers are endorsing the opposite strategy.
“Our suggestion that investors may want to buy at this point is a counterintuitive conclusion. Jet fuel can represent up to 25% of an airline’s total expenses,” reports Al Root for Barron’s. “But the U.S. airline industry has earned record profits when oil was about $100 a barrel and gone bankrupt when oil was $40 a barrel. Over the long run, it is the supply and demand balance between airplane seats and customers that determine industry profitability, not the absolute price of oil.”
Altitude For JETS
Remember that airlines are yet to report fourth-quarter earnings, a period that includes what was a brisk travel season for the industry.
Airlines for America (A4A), the industry trade organization for the leading U.S. airlines, projected that 47.5 million passengers will fly globally on U.S. airlines over the 18-day winter holiday travel period from Thursday, December 19, through Sunday, January 5.
A4A projects an average of 2.6 million passengers will take to the skies each day over the holidays, with daily volumes ranging from 2.2 million to 3 million. That is an increase of 3 percent from the comparable period a year ago, and to accommodate the 72,000 additional daily passengers, airlines will offer 88,000 additional seats per day and 884 more flights per day.
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With airlines having shown a penchant for increased profitability in recent years, due in large part to ancillary fees and the robust U.S. economy, JETS can potentially stand firm the face of increased near-term oil market volatility.
“One conflict shouldn’t change the yearlong outlook for the industry. And it could provide an attractive entry point for aggressive investors willing to buy the stocks as prices fall,” according to Barron’s.
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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.