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Can Airlines Funds Take Off on Profit Outlook, Low Fuel Cost?

The Airline sector is witnessing improving trends right now, and the momentum is much needed to ensure profits for investors in this space. While much of the encouragement comes from fundamentals within the Airline space, another key catalyst for the sector's growth is the slumping oil price.

Airline stocks will likely continue their bull run into 2016 as recently reinforced by the encouraging outlook provided by the International Air Transport Association (IATA). Separately, weakness in oil prices , which has lasted for well over a year now, is nothing short of a godsend for the airline space. Airline profits depend largely on fuel prices which form nearly 30% of operating expenses and are also the major variable component in the industry. Operating expenses of airline companies have gone down considerably as fuel accounts for one of the major input costs for air carriers.

Thus, it is time to focus on funds that have investments in the airline space. Please note that there is hardly any fund that focuses solely on airline stocks. However, the sector attracts heavy investments from many mutual funds that focus on the transportation sector. The funds we discuss may not carry a favorable Zacks Mutual Fund Rank at the moment, but an improving trend in the airline space demands attention on them.

Airliners Fly High as Crude Hits Ground

Stocks in the airline space soared following the Dec 4 decision by the Organization of the Petroleum Exporting Countries (OPEC) - the international cartel of oil producers - to not curb output of crude. A blip came thereafter as Southwest Airlines ( LUV ) revealed a disappointing outlook with respect to its operating revenue per available seat miles (RASM) for the fourth quarter of 2015. Nonetheless, the low oil price environment makes airline stocks attractive.

The drop in oil prices has reduced airline companies' operating expenses significantly, thereby boosting the bottom line. OPEC's decision not to curb output despite the slump in prices means that the oversupply will continue to haunt the energy space. This implies good times ahead for airline carriers.

Weak oil prices have resulted in tremendous savings and improved bottom lines for carriers in the past quarters. The massive savings have certainly supported the financial health of carriers and prompted them to launch share buyback programs, hike dividend payments and significantly reduce their debt levels.

Buoyed by their sound financial health, several carriers intend to invest heavily in upgrading overall facilities for better customer satisfaction. This is likely to result in greater travel demand, improved goodwill and eventually, a higher top line.

Although it is true that most carriers struggled to post meaningful revenue growth in the third quarter of 2015 courtesy of a strong US dollar, their bottom lines benefited owing to low fuel costs.

IATA's Outlook Buoys Airliners Further

The International Air Transport Association now expects profits in the aviation industry to touch $36.3 billion in 2016 with a net profit margin of 5.1%. IATA also projects profits of around $33 billion in 2015 with net profit margin of 4.6%, marking an improvement from the previous guidance of $29.3 billion which was released in Jun 2015.

Christmas holidays and summer vacations will contribute to traffic. IATA projects 6.7% and 6.9% growth in air traffic in 2015 and 2016, respectively, with load factor or percentage of seats filled by passengers pegged at 80.7%. IATA also believes that 3.8 billion passengers will travel in 2016.

Moreover, increased fleet restructuring programs, retiring older and less efficient aircraft and new aircraft orders are anticipated to enhance the performance level of the company by trimming fuel and operating costs, and rendering a comfortable flying experience. Moreover, most carriers are focused on augmenting ancillary revenues by launching value-added services at affordable rates.

Funds In Need of a Turnaround

Although there is no airline-specific mutual fund category, the space represents a substantial portion of the transportation sector. Mutual funds from the transportation sector with significant focus on airliners are the ones to watch out for. Not all of them may be carrying a favorable rank right now, but the positives are much needed to turn the tide for them.

Fidelity Select Transportation ( FSRFX ) seeks growth of capital. FSRFX invests the majority of its assets in common stocks of firms mostly involved in providing transportation services or ones that design, manufacture and sale transportation equipment.

FSRFX is the only fund that carries a Zacks Mutual Fund Rank #2 (Buy). FSRFX has not been able to stay in the green in recent times, as its year-to-date and 1-year returns are -16.7% and -13.7%, respectively. The 3- and 5-year annualized returns are, however, respectively 19.2% and 11.8%. Annual expense ratio of 0.81% is lower than the category average of 1.14%. FSRFX carries no sales load.

Among the top 10 holdings, FSRFX holds airline companies such as Southwest Airlines, American Airlines Group Inc ( AAL ) and Delta Air Lines Inc ( DAL ).

Rydex Transportation Investor ( RYPIX ) invests a large chunk of its assets in domestically traded companies from the transportation sector and in other securities including futures contracts and options. RYPIX may allocate a notable portion of its assets in companies having market capitalization within the range of small to medium size. RYPIX may also invest in ADRs in order to gain exposure to non-US companies and may also invest in US government securities.

RYPIX currently carries a Zacks Mutual Fund Rank #4 (Sell). The year-to-date and 1-year losses of RYPIX are 12.4% and 8.6%, respectively. The 3- and 5-year annualized gains are respectively 19.4% and 11%. Annual expense ratio of 1.35% is higher than the category average of 1.14%. RYPIX carries no sales load.

Among the top 10 holdings, RYPIX holds airline companies such as Delta Air Lines , Southwest Airlines and American Airlines Group.

Fidelity Select Air Transportation Portfolio ( FSAIX ) seeks long-term capital growth. FSAIX invests the major portion of its assets in companies primarily engaged in providing air transport services all over the world. FSAIX focuses on acquiring common stocks of companies depending on factors such as financial strength and economic condition.

FSAIX currently carries a Zacks Mutual Fund Rank #4 (Sell). The year-to-date and 1-year losses of FSAIX are 6.5% and 3.2%, respectively. The 3- and 5-year annualized gains are respectively 23.1% and 15%. Annual expense ratio of 0.83% is lower than the category average of 1.14%. FSAIX carries no sales load.

Among the top 10 holdings, FSAIX has airline companies such as Southwest Airlines, American Airlines Group, Delta Air Lines and Spirit AeroSystems Holdings ( SPR ), which is one of the largest independent suppliers of commercial airplane assemblies and components.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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