The airline industry continues to face challenges from concerns
related to business travel and oil prices and the seemingly
never-ending market turmoil. The major threat to the airline
industry is fuel price volatility, which is, besides hedging
techniques, beyond the control of airlines (Read:
Airline ETF Hits Turbulence On Oil Surge
).
While higher oil prices make aircraft operations expensive,
lower prices indicate a slowing economy and result in a fall in
global air travel demand.
The fluctuating trend in oil prices and mounting tension over
Iran and the other Middle East nations are keeping airlines under
pressure (Read:
Three ETFs For An Iranian Crisis
). Added to these concerns are broad fears of oil price increases
in the second half of the year and declining demand from key
emerging nations which had been making up the bulk of air travel
increases in the recent past.
Beyond these emerging market woes, developed markets aren't much
better, especially in the case of Europe. Despite a number of
bailouts, Europe's woes are intensifying with all eyes on Greece,
Spain and Italy as they attempt to stop the slide in their
economies (Read:
Spanish Bailout: Did It Help European ETFs?
).
In fact, threats of a recession are also looming on the economy
at large. In such scenario, the warning of a drop in air travel
demand would jeopardize airlines, thereby hurting the performance
of the airline stocks and any ETF with exposure to the sector (See
more ETFs in the
Zacks ETF
Center
).
Robust Airline Outlook
Challenges notwithstanding, the airline industry has been a
solid segment of the industrial sector so far this year (Read:
Three Industrial ETFs Outperforming XLI
). This is because the airlines are well positioned to endure the
prevailing crisis situation and ready to face the burden of slowly
rising oil prices. Successfully passing on the increased costs to
customers in the form of fare hikes and efficient use of
fuel-hedging strategies are effective tools to combat the pressure,
and the prolonged period of relatively low prices has certainly
been helpful to these firms so far in 2012.
Further, the airlines are reducing their capacities and
replacing their older fleet, which are no longer feasible in a
fuel-expensive environment, with the latest fuel-efficient
aircraft. This move looks to save fuel cost to a certain extent.
Besides, they are adding novel features to their services and
introducing new products to enhance their value and profitability
such as wi-fi and satellite TV options.
Moreover, a booming e-commerce market, airport expansion plans
and development in western China are leading to robust airfreight
growth in emerging markets. With new airlines business and advanced
technology, the demand for flying is also on the rise. About
one-thirds of the demand is expected to come from Asia that will
likely offset the weak demand in Europe and the U.S. (Read:
Play Europe with This ETF Pair Trade
)
These strong aspects make the airline sector an intriguing
option to play at present. Investors have only one ETF to play in
this slice of the industrial market which offers broad exposure to
the space:
Guggenheim Airline ETF (
FAA
)
Launched in January 2009, the fund has held up nicely so far
this year, producing double-digits gains. It seeks to replicate the
price and performance of the NYSE Arca Global Airline Index, before
fees and expenses.
With AUM of $17.3 million, the ETF has about 26 securities in
its basket, with airlines from around the world. Major U.S.
airlines like
Southwest Airlines Co. (
LUV)
,
United Continental Holdings Inc. (
UAL
)
and
Delta Air Lines Inc. (
DAL
)
dominate the top three spots, making up for a combined 44% of the
share.
In total, international airlines comprise for about 29% of the
fund giving the product high levels of exposure to foreign air
travel as well. Additionally, the product provides excessive
exposure to mid-cap companies, though nearly 38% of the assets come
from large and small caps. (Read:
Mid Cap ETF Investing 101
)
The fund has more than 95% correlation with the developed
markets and 5% with the emerging markets. From the country exposure
look, the fund is heavily exposed to United States with 70% of the
assets, followed by Germany, Japan, South Korea, Panama, Spain,
Ireland, Brazil, Sweden and Australia.
The fund is liquid as it trades in good volumes of about 10,000
shares on a daily basis (Read:
Guide to the 25 Most Liquid ETFs
). Though the product is quite expensive with an expense ratio of
0.65%, it does have a relatively wide bid ask spread which could
add to total costs for traders.
The fund has returned about 17% in the first half of the year
and yields about 0.97% dividend per annum. While the yield is far
less than that of the broad industrial sector, the capital gain
performance has been quite strong, far outpacing broader funds in
the similar time frame.
Should oil prices remain at moderate levels and if both emerging
and developed markets can continue to hold up nicely, investors
could see this trend continue, although it could be a turbulent
ride for the airline industry as we close out 2012.
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DELTA AIR LINES (DAL): Free Stock Analysis
Report
GUGG-AIRLINE (FAA): ETF Research Reports
SOUTHWEST AIR (LUV): Free Stock Analysis Report
UNITED CONT HLD (UAL): Free Stock Analysis
Report
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