A way to play the global economy decline is by shorting the airline industry. Here we turn to underground investor Martin Denholm, writing in today’s Smart Profits Report. The problem with the airline industry is that in business terms, it can be “lose-lose,” no matter what the economy is doing…
When the economy is solid, demand rises and more people fly. But a rising economy also pushes up oil prices and offsets the airlines’ bottom line. Add to that the large number of carriers within the industry all fiercely competing and battling to win passengers, and that eats into profitability, too.
When the economy is struggling and the job market is poor, many people have less disposable income - and consequently fewer people want to fly. Here in Baltimore, for example, BWI Airport saw 7.5% fewer passengers in March, compared with March 2008. In addition to less demand, oil is a volatile resource, under threat from geopolitical shenanigans at any time.
Right now, of course, we have the latter. And the numbers paint an ugly picture…
Consider the following ugly bunch of data from the International Airline Transport Association (IATA).
1) From an estimated $4.7 billion loss as recently as March, it now forecasts $9 billion worth of losses.
2) Airline industry revenues are projected to hit $448 billion this year - a 15% drop over 2008.
3) By region, the numbers show a $1 billion loss for North American airlines this year (much better than the $5.1 billion loss in 2008, but this is largely due to the oil price decline)… a $1.8 billion drop for European carriers… and a $3.3 billion tumble for airlines in the Asia-Pacific region.
4) On Monday, Japan Airlines, which boasts the best revenues in Asia, said it will cut its international routes by 10% during the current business year. It was the latest in a string of route cutbacks from global airlines.
5) The IATA says passenger demand will fall by 8% to just over two billion this year, with cargo demand suffering a 17% drop, as the global economy slumps.
Martin says an easy way to profit from airlines woes is to short the Claymore/NYSE Acra Airline ETF (NYSE:FAA). This relatively new ETF tracks highly capitalized and liquid US and international passenger airlines. FAA is down 12.6% since its recent May 6 high. And there could be plenty more pain on the horizon.
Martin recommends shorting two airline indexes: TheAirline Index (AMEX: ^XAL) and the Claymore/NYSE Arca Airline (NYSE: FAA). Good luck!