Examining Oil Issues With The New Airline ETF
Summary Oil prices have been rallying. Higher oil prices could weigh on airliners’ bottom lines. However, this may not necessarily spell doom for the new global airline-related ETF. By Todd Shriber & Tom Lydon Investors who are familiar with airline equities are inevitably familiar with how oil prices affect those stocks. After all, fuel and labor are the two biggest input costs for airlines, and last year’s 42.4% swoon for the United States Oil ETF (NYSEARCA: USO ) explains why airline stocks were among Wall Street’s darlings in 2014. Oil prices have recently rallied, with USO up nearly 5% for the 90 days ended May 8, but that does not necessarily spell trouble for some of the holdings of the newly minted U.S. Global Jets ETF (NYSE: JETS ) . In a Cowen note posted by Ben Levisohn of Barron’s , the research firm had this to say about American Airlines (NASDAQ: AAL ): “American forecasts 2Q15 pre-tax margin of 17% to 19%, down from their prior estimate of 18% to 20%. The reduction in guidance is based on higher than expected jet fuel costs . Jet fuel has bounced off the bottom since initial guidance and is now forecast to be ~10 cents higher per gallon than initially expected in 2Q15. Management forecasts 2Q15 jet fuel of $1.94 to $1.99/gallon, up from prior guidance of $1.84 to $1.89/gallon previously. American shares have lagged the XAL index in 2Q, down 7.1% vs. the XAL up 0.3%. We believe higher jet fuel costs are already baked into the shares given the performance quarter to date. Management reiterated their 2Q15 PRASM range of down 4% to 6%.” American Airlines ties with rival United Continental (NYSE: UAL ) as the third-largest holding in JETS , at a weight of 11.17%. With a year-to-date loss of 7.7%, Texas-based American is the worst performer among JETS’ four largest holdings, though it should be noted that only Southwest Airlines (NYSE: LUV ) has traded to the upside this year. Predictably, JETS has shown some sensitivity, though positive to this point, to oil prices. Granted, the sample size is small, but since the fund debuted on April 30, USO is off 0.7%, where the airline ETF is higher by almost 3.5%. Delta Air Lines (NYSE: DAL ), Southwest and United Continental are all up more than 5% since JETS came to market , while American Airlines is higher by almost 3%. That quartet combines for 46% of the new ETF’s weight. Prospective JETS investors will find interesting the industry outlooks held by CEOs of some of the new ETF’s holdings. As Frank Holmes of U.S. Global Investors notes, American CEO Doug Parker recently told that company’s board he wants to be compensated in shares, while foregoing a traditional salary. “Fellow airline executive Maurice J. Gallagher Jr. of Allegiant Air has also passed on cash, receiving a little over half a million dollars in stock and options in 2013 alone,” according to Holmes. Allegiant Travel (NASDAQ: ALGT ), the parent company of Allegiant Air, is the ninth-largest holding in JETS, at a weight of almost 3.5%. JETS’ Top 10 Holdings (click to enlarge) Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.