Loosened restrictions and the reopening of economies around the world can potentially benefit both the airline and shipping industries alike. Investors can also gain exposure to these shifting trends through exchange traded fund strategies as we head into the second half of the year.
In the recent webcast, In a Post-Lockdown World, These Strategies Offer Exposure to Transportation’s Rebound, Frank Holmes, CEO of U.S. Global Investors, highlighted the ongoing rebound in transportation and travel demand. For example, TSA checkpoint data continues to recover, reaching pre-pandemic levels. However, the recovery remains uneven as lingering concerns remain, such as COVID-19 lockdowns, the war in Ukraine, elevated inflation, and rising interest rates.
Nevertheless, the overall outlook remains positive. Holmes noted that according to International Air Transport Association’s 2022 outlook, global industry revenues are expected to reach $782 billion, with passenger revenues accounting for $498 billion and cargo revenues accounting for $191 billion. In Europe, the financial performance of airline carriers has been upgraded with an expected post net losses of $3.9 billion in 2022 compared to losses of $11.9 billion in 2021.
JetBlue also recently won the bidding war against Frontier Airlines, to acquire Spirit Airlines for $3.8 billion, making the combined JetBlue and Spirit the fifth-biggest carrier in the U.S.
Beyond the short-term hurdles, the overall long-term outlook remains bullish for the travel and transportation industry as the number of passenger and freighter aircraft is expected to more than double in 20 years. Passenger traffic is even expected to maintain a growth of 3.6% CAGR from 2019 through 2041.
Meanwhile, on the high seas, shipping rates have continued to push higher. About 80% of the volume of world trade in goods is carried out by sea, and for developing countries, the percentage can be even higher.
In the first quarter of 2022, Holmes noted that global trade even hit a record $7.7 trillion, compared to about $4.5 trillion back at the height of the COVID-19 pandemic. Looking ahead, Holmes anticipates global dry bulk demand to continue to increase in the next two years.
ETF investors who are interested in gaining exposure to the growth in air travel and sea transportation can turn to targeted ETF strategies to access these industries.
For example, the U.S. Global Sea to Sky Cargo ETF (NYSEArca: SEA) tracks the U.S. Global SEA Index. The underlying index includes companies involved in the marine shipping, air freight/couriers, or other transportation industries, as determined by independent industry listings (collectively, “Cargo Companies”) with an allocation of 70% of the index’s weight to sea shipping companies and 30% to air freight companies at the time of each quarterly reconstitution and rebalance of the index.
Specifically, the top six shipping companies with a combined ranking of market capitalization, cash flow return on invested capital, cash-flow-to-price, and earnings-to-price get a 5% weighting each. The next seven shipping companies, by a combined ranking of market capitalization, cash flow return on invested capital, cash-flow-to-price, and earnings-to-price get a 4% weighting each. The next six shipping companies, by a combined ranking of market capitalization, cash flow return on invested capital, cash-flow-to price, and earnings-to-price get a 2% weighting each. Lastly, the top 10 air freight companies by a combined ranking of market capitalization, cash flow return on invested capital, cash-flow-to-price, and earnings-to-price each get a 3% weighting.
Additionally, investors have turned to the U.S. Global Jets ETF (NYSEArca: JETS) as a way to access the recovery in the global airline industry. JETS has also become a popular mechanism for many retail investors to gain diversified exposure to the airline industry instead of betting on single airliners. 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, airport companies, internet media, or other services related to airlines.
Financial advisors who are interested in learning more about the airline and shipping industries can watch the webcast here on demand.