A recently created airline ETF got me thinking about whether now is a good time to invest in the sector.
Before I get started, though, I want to send my condolences to those who lost loved ones when Continental Connection Flight 3407 crashed in Buffalo, N.Y., on Feb. 12. Events like this are heart-wrenching, but, thankfully, they are few and far between.
What’s in a Name?
In the continuing tradition of coming up with cute ticker symbols for exchange-traded funds (ETFs), Claymore Securities recently launched the first airline ETF — the Claymore/NYSE Arca Airline ETF.
The symbol? FAA. How sweet.
It got me to thinking about other clever symbols. Here’s a list I came up with, just for grins and giggles:
- FAN — wind energy
- TAN — solar energy
- JNK — high-yield bonds
- MOO — agribusiness
- COW — livestock
- DIG — oil & gas
- DUG — short oil and gas
- KOL — coal
- CUT — timber
- WOOD — timber & forestry
- GULF — Middle East dividend
- ROI — large-cap growth
- DOG — short Dow
- ROM — technology
OK, enough silliness. Let’s get back to FAA.
Will FAA Take Flight?
You’d think with more than 700 ETFs floating around (as of the end of November) that someone would have launched an airline ETF by now. But FAA is the first.
Other than its ticker, there’s nothing terribly creative about FAA, which tracks the newly created NYSE Arca Global Airline Index. The ETF contains 25 stocks, with U.S. carriers comprising 70% of the assets.
Interestingly, not one of the 25 qualifies as a large-cap stock (more than $10 billion in market cap). This tells you how far airlines have fallen.
The major players on the U.S. side are Continental Airlines (CAL), Southwest Airlines (LUV) and AMR Corp. (AMR), which make up about 40% of the fund’s assets.
CAL, LUV and AMR reported earnings at the end of January, and all logged losses. None were a surprise.
In a tragic twist of fate, most airlines reported that falling profits last quarter were due in part to losses from locking in fuel prices when oil was so high. The drop in oil prices was so severe that these hedges forced the companies to pay more for fuel than the market price.
Sort of sounds like the car companies shutting down truck lines while oil prices were falling off a cliff.
Despite the losses, airlines are a sexy pick for 2009. Fuel costs will decline markedly, and airlines usually lead an economic recovery. At least, that’s what the pundits tell us.
But I’m not so sure about that.
The AMEX Airline Index (XAL) has settled into a sideways pattern after staging a recovery off the July low that synched with the drop in oil. But it’s had trouble making headway since oil stabilized. The economy remains in the recession’s grip, and there have been precious few signs of a recovery.
That’s why all the fuss about airlines worries me. I hear a lot of hopeful talk starting off with “if this happens” or “when that happens.” Sectors, like stocks, bounce when fear is highest — not with hopeful talk of recovery.
I believe the airlines have great potential. They’ve been beaten down for a while, suffering setback after setback. Eventually, they’ll recover. But I’m not convinced that now is the time. Earnings were poor and the outlooks weak. Oil is a major wild card. And there’s too much optimism and hope.
Will I miss the bottom in airlines by staying away?
Perhaps. But I suspect the eventual rally will probably be large enough that I wouldn’t mind hopping aboard while it’s in progress. For the time being, though, I think I’ll sit on the sidelines and wait to see whether FAA takes off.
Jon Lewis is the co-editor of The Winning Edge trading service designed to help you make options profits around corporate earnings and other market events. For more information about Chris, read his bio here.
