The U.S. Global Jets ETF (NYSEARCA:JETS) is a collection of 33 companies that participate in the global airline industry. A significant number are airline stocks while the remainder are aircraft manufacturers or play some part in airline travel.
JETS stock is down 6.7% year to date through May 18, 897 basis points worse than the S&P 500. The top four holdings, which account for 47% of the ETFs $99 million in net assets, are down an average of 9.3%.
As oil prices and labor costs rise, airlines are finding it harder to deliver profitable growth. This downturn in airline stocks might be with us for some time.
So, the question becomes, are there any airline stocks worth owning?
The Obvious Choice
If you believe the airlines are merely going through a correction to reflect more reasonable share prices, owning a basket of airline stocks through an ETF like JETs, despite its 0.60% management expense ratio, is the best way to go.
“I think they’re a big buy, because this is not your grandfather’s airline,” Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management, said in January on CNBC. “The conventional wisdom now is that oil prices are high, so maybe airlines stocks are going to get hit, but I don’t think that’s the case anymore. They are such well-run machines at this point, they’re basically IT businesses masquerading as transportation businesses.”
Of course, Schlossberg’s statement could lead you to ponder which of the airline stocks are the best run because it is those airlines that will survive higher oil prices.
Which Airline Stocks?
As they say, “Beauty is in the eye of the beholder.”
Personally, I believe if you’re going to invest in a single airline stock it’s got to be Southwest Airlines Co (NYSE:LUV).
“Southwest isn’t dirt cheap by any means, but for those of you who see Delta as the cheaper stock, you might want to consider which airline is the better operator in times of economic difficulty,” I wrote in April. “That’s Southwest in a walk.”
I admitted in my article that the easy profits had been made by the airline industry over the past 2-3 years due to low oil prices and economically confident leisure and business travelers; the next couple of years aren’t going to be nearly as easy for the airlines no matter how technologically advanced they are.
History will repeat itself despite the optimism of analysts.
However, I see Southwest being the best run and possessing high-quality earnings. If anyone can prosper in a high-cost business environment, it’s Southwest.
A Possible Wildcard for Airline Stocks
If you look at JETS’ 33 holdings, you’ll notice that the weightings of the stocks drops off precipitously after the fourth-largest holding, American Airlines Group Inc (NASDAQ:AAL), from 10.61% to 4.38%.
That’s because the U.S. Global Jets Index, whose performance the ETF tracks, invests 12% of the portfolio in each of the four largest U.S. passenger airlines based on market cap and to a lesser extent, capacity. The next five each get a 4% weighting and it scales back after that with the holdings reconstituted and rebalanced quarterly.
One of the 4% holdings is Alaska Air Group, Inc. (NYSE:ALK). The fifth-largest airline in the U.S., it crossed my radar screen in 2016 when Alaska Air acquired Virgin America for $2.6 billion.
It was a sad day when Alaska Airlines took over Richard Branson’s American version of Virgin Airlines. Soon the Virgin America planes will be repainted to Alaska Airlines blue with the familiar Inuit face on the tail.
Nostalgia aside, Alaska Airlines’ business is going like gangbusters on the West Coast. So much so that it’s redeploying more than 100 pilots based out of New York City to work out of California to cover its busiest market.
Almost 25% of Alaska Airlines’ network is in California with a strong presence in both San Francisco and Los Angeles in addition to its traditional strongholds of Seattle, Portland and Anchorage.
ALK stock is down 20% year to date through May 18. Its profit margins have fallen through the floor but it is working on several initiatives to improve its profits in the second half of 2018 and into 2019.
Alaska Airlines hasn’t traded under $75 consistently since June 2016. Now under $60, if you see airlines making a recovery in 2019, this is one of two airline stocks to buy; the other being Southwest.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.