An airline-specific exchange traded fund could be a good way for investors to capitalize on a potentially high-flying sector.
On the upcoming webcast (available for CE Credit), Why You Should Consider Investing in the Busy Summer Travel Season, Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors, argued that the airline industry may enjoy a wide economic moat that will help the business maintain a competitive advantage over competitors to help protect long-term profits.
A number of factors may support the airline industry and translate to increased revenue growth ahead. For instance, Holmes pointed out that the percent of U.S. adult population who claimed to have flown at least once in the past 12 months was 49% in 2016, compared to 21% back in 1971. There are an average 2 million travelers flying per day.
An expanding global middle class, especially with the growing emerging economies, will support increased demand as more middle-class consumers look to increase discretionary spending through traveling. The OECD projects that the global middle class will expand to 3.2 billion by 2020 and 4.9 billion by 2030.
While there are more travelers in the skies, many airlines have enjoyed increased fares and fees, along with ancillary revenue from non-ticket sources, that have helped lift revenues. Ancillary revenue has increased 27 times in 2016 from 2007.
The supply side has also decreased to help support pricing power among the fewer airlines available. Over the years, the airline industry has experienced greater consolidation with larger companies taking over smaller businesses. Moreover, the number of pilots has been steadily decreasing, which may also limit the number of flights or cause airlines to increase prices. About 34% of current pilots are expected to retire by 2021.
Consumers, though, may have heard some unflattering headlines concerning the airline industry in recent months, such as a passenger dragged out of a United Airlines plane. However, these events may be considered noise or short-term risks that could potential open attractive entry points for investors.
“We believe bad news is good news for airlines,” Holmes said. It offers an “opportunity to improve customer experience.”
Low oil prices have also helped cut down airline costs or improve revenue. Some airlines have even entered into the energy segment to better control costs – in an attempt to address fuel costs, Delta Air Lines acquired its own refinery in 2012.
Investors may enjoy a yield-generating opportunity with the airline industry ahead. For example, the benchmark Bloomberg U.S. Airlines Index has exhibited a 20.1% 1 year dividend yield growth, compared to the -3.4% 1-year yield contraction in the Dow Jones Transportation Index.
The airline industry is trading at more attractive valuations relative to the broader equity markets. The Bloomberg U.S. Airlines Index shows a 9x price-to-earnings ratio, compared to the 16x for the Dow Jones Transportation Index and 22x for the S&P 500.
Investors interested in flying with the airline industry can consider the U.S. Global Jets ETF (NYSEArca:JETS), the lone ETF dedicated to airline stocks. The ETF follows a kind of smart beta indexing methodology that allocates about 12% to the top four domestic airlines, followed by a 4% tilt toward the next five domestic airlines, 3% position in the next four domestic airline industry companies and lastly a 1% weight in the top 20 foreign airline industry companies.
Financial advisors who are interested in learning more about summertime investments can watch the webcast here on demand.