As a counter-intuitive investment opportunity given current economic uncertainties and recession fears in the US, I am offering the global passenger airline industry. Despite a less-than-stellar history of losses and bankruptcies, industry analysts and experts are predicting a wave of consolidation in both the domestic and global passenger airline markets aimed at reducing excess capacity, improved pricing power, and increasing market share. The largest player in the domestic market is AMR Corp. (AMR) with less than a 20% market share, leaving plenty of room for M&A activity in an industry which had two major companies emerge from Chapter 11 last year – Delta (NYSE:DAL) and Northwest (NWA) –allowing for the elimination of many legacy costs and obligations in the process.
The former Chairman and CEO of Continental (NYSE:CAL) who is now a consultant for Pardus Capital Management, Gordon Bethune, recently appeared on CNBC to discuss the airline industry – stating that consolidation is necessary for US airlines to compete internationally. He also stated that Delta has reportedly received authorization from its Board to enter merger talks with both Northwest and United Airlines (UAUA), with the latter combination most likely to win the approval of labor unions. Finally, he mentioned that foreign carriers such as Air France KLM (Paris: AIRF), Lufthansa (Germany: LHAG), and Singapore Airlines (Singapore: SIAL) may also play a role in domestic airline consolidation.
As an alternative to investing in individual airline stocks, I have developed a Global Airline exchange-traded fund [ETF], which chooses the top 22 worldwide airline stocks with market caps over $750 million [USD]. Through a proprietary selection process, my Global Airline ETF posted a 52-week gain of 17.1%, as compared to losses of 48.4% for the AMEX 14-Stock Airline Index [XAL] and overall market losses of 7% as measured by the S&P 500 (NYSEARCA:SPY) ETF during the same time period. The primary advantage to my Global Airline ETF is foreign exposure, as the top three performers were all based in China – including Air China (Shanghai: 601111), China Eastern Airlines (NYSE:CEA), and China Southern Airlines (NYSE:ZNH).
I am actively seeking a commercialization partner for my Global Airline ETF and can be reached by email for more details. A Global Airline ETF and index would provide investors with a single investment vehicle that trades with the convenience and liquidity of a regular stock, while providing a leveraged play on global economic expansion since the passenger airline industry is closely tied to economic activity. Of the 22 stocks selected for my ETF, only three were US-based, reflecting the poor performance of the domestic airline industry and strength in ex-US markets and economies. I have also launched a survey through my website and blog to obtain new ETF ideas that investors would like to see launched in 2008. Feel free to submit multiple ideas from any sector of the economy, which may include global markets, through this link. The survey is completely anonymous and does not collect any private information, as it only collects what each participant submits as their response.