By Jared Cummans
The last few years have been anything but kind to the global airline industry. After skyrocketing fuel prices ate into profit margins, the onset of a global recession dramatically cut demand for business travel and international flights, two big moneymakers for airlines. Then in one of the more bizarre developments in recent memory, the eruption of a volcano in Iceland ground air travel to a halt for several days, costing the industry hundreds of millions of dollars in lost revenue and unexpected expenses. Throw in a number of labor stoppages and ongoing concerns over terrorism (as well as a close call last December), and investors are understandably uneasy about investments in airlines.
But suddenly the outlook for the airline industry looks bright. International air-passenger traffic jumped by 12% in May on a year-over-year basis, and many are expecting the industry to return to the black this year. According to the International Air Transport Association, airlines are expected to generate profits of $2.5 billion this year, compared to a loss of nearly $10 billion in 2009. The projected profitability still represents a razor-thin margin–less than 1% of revenue–but the fact that the industry has stemmed losses is no doubt encouraging.
While airlines have made up significant ground over the past year, Giovanni Bisignani of the International Air Transport Association cautions that “we are still a long way from profitability.” Bisignani urged airlines to focus their efforts to match capacity to demand and control costs as best they can, to help the airline industry boost its earnings in the weeks to come. One important aspect to note was that the Euro region saw the weakest growth in international passenger traffic, linked to the financial crisis that the region is currently experiencing.
For investors seeking exposure to the booming airline industry, we outline a primary option below.
Claymore/NYSE Arca Airline ETF (NYSEARCA:FAA)
FAA seeks to replicate the NYSE Arca Global Airline Index, a modified equal-dollar weighted index designed to measure the performance of highly capitalized and liquid U.S. and international passenger airline companies identified. With about 25 holdings, FAA offers exposure to many of the world’s largest airlines, including United Airlines (15.3%), Southwest Airlines (14.8%), and Delta (14.2%) along with several airlines based overseas. The fund allocates 70% of its assets in the U.S. with the remaining 30% spread among a multitude of countries.
FAA will be an important ETF to watch in coming months, as investors monitor the airline industry’s progression towards profitability. If airlines are able to build off the momentum and begin generating positive cash flows, FAA could soar. But given the unpredictability of the industry, predicting FAA’s flight path is nearly impossible. For investors with a tolerance for a little risk, this ETF could make an intriguing way to bet on a continued global recovery; if Europe is able to get back on solid ground, the airline industry could be a big beneficiary.
Disclosure: No positions at time of writing.