6 Reasons Why JETS ETF Could Fly Higher
Gone are the days when aviation companies were ill-famed for their bankruptcy protection status. During 2005 and 2008 , over half of the U.S. carriers functioned under Chapter 11 of bankruptcy protection. But things have changed in the last seven years. Since last year, the U.S. aviation industry has been soaring with oil price going into a tailspin. Moreover, a pickup in the domestic economy, rising cargo demand and a boost to tourism bode well for the sector and the pure play airline ETF U.S. Global Jets ETF (NYSEARCA: JETS ) . The fund was up 6.5% in the last one month though it lost slightly in the first quarter, resulting in a muted year-to-date return of 2.3% (as of August 19, 2015). Since the fund is new in the industry and debuted on April 30, 2015, let’s take a look at the drivers that can take the fund higher in the coming days. To analyze this, we have considered the details provided by U.S. Global Investors in its JETS presentation. Higher Margin & Lower Debt: The U.S. airline industry saw the 10-year best margin performance in 2014. Not only this, U.S. airlines are projected to see huge free cash flows (in the range of $15,000 to $20,000 million) in the coming three years including 2015. These figures represent a remarkable jump from less than $5,000 million of FCF earned in 2014. The debt-ridden airlines are also paying down borrowings over the years. Total debt in proportion of operating revenues came down to 41.4% at the end of 2014 from around 65% at the end of 2010. Surge in Ancillary Revenues: Apart from the key business, supplementary revenues including hotel accommodation, car rentals, onboard food, and travel insurance are all performing well. Restructuring: Modifications in operations and carrier structure are on in full swing. While slimmer seats and the addition of more rows resulted in about a 16 percentage point increase in passenger load factor in 10 years (till Q2 of 2014), fuel-efficient aircraft contributed to energy savings. Limited Capacity Growth: Most airlines recently acknowledged plans of adding lesser fleet in the coming days. While several factors are responsible for this decision, a shortage of pilots is the primary reason. As per U.S. Global Investors’ report, as much as 34% of present pilots will retire by 2021. Solid Earnings: The positive factors led to an immense improvement in the companies’ earnings. The airline stocks gained altitude post Q2. In any case, cheap fuel has been a windfall and will likely remain so in the quarters to come. The mounting middle-income population in emerging markets is benefitting worldwide customer growth. Strong Zacks Metrics: At the time of writing, the sector resides in the top 16% of the Zacks Industry Rank. Most of the industry players have a top Zacks Style Score of ‘A’ for their Growth and Value metrics, suggesting a bullish outlook for the space. By now, one must have realized that the underlying trend is solid in the airlines industry. So, investors might play it via the basket approach to tap the entire potential of the space. And to do so, what could be the best option other than the JETS ETF? The fund holds 33 stocks in its portfolio and is concentrated on a few individual securities, as it allocates about 70% to the top 10 holdings. Southwest (NYSE: LUV ) (12.75%), Delta Air Lines (NYSE: DAL ) (12.49%), United Continental (NYSE: UAL ) (11.9%) and American Airlines (NASDAQ: AAL ) (11.34%) are the top four elements in the basket, with a combined share of about 45%. Other firms mentioned above also get places in the top 10 chart, each with over 4% weight. The product charges 60 bps in fees. Original Post