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Insights to Consider When Investing In the Airline Industry

24 March 2015 in Investing Insights

There is 2,438 miles between California and New York and most of us would rather take a five-hour flight than a 41-hour-road-trip. However, even 41 hours is a piece of cake compared to how long it took the first settlers after the War of 1812 to move out west. Through foot, horse, and carriage, the adventurous American might be lucky to make the trek in less than three months. Given the conveniences and efficiencies the airline industry has created over time, how has it affected the economy and performed from an investment perspective?

NOTEWORTHY ECONOMIC IMPACTS OF AIRLINES

The amount of money consumers pour into air travel is noteworthy to start. A 2014 report by the FAA found that in 2012 alone, air travelers spent more than $400 billion just to get from Point A to Point B (and often to get back to Point A again). That accounted for roughly 2.6% of the entire United States’ GDP. And if you look at the entire civil aviation industry’s impact as a whole, it generated $847 billion or 5.4% of GDP.

Additional economic impacts the FAA reported on how the airline industry supports growth include:

  • The U.S. is a top net exporter in civil aircraft manufacturing with a positive trade balance of $54.3 billion.
  • U.S. airports support over 61.2 billion revenue ton-miles (RTM) of transported freight.
  • Over 830 million passengers take flights in U.S. airspace, which is approximately $1145 billion RTM.
  • Commercial airline operations supported over $260 billion of visitor expenditures on goods and services.
  • The civil aviation industry supports roughly 11.8 million jobs and $1.5 trillion in total economic activity.

THE AIRLINE INDUSTRY’S MARKET PERFORMANCE

There are a lot of positive growth impacts from the airline industry on the economy. Is this visible in the markets? First, take a look at the S&P 500’s performance. Over the last two years, the S&P has risen by over 40% and the Dow Jones U.S. Airlines Index (DJUSAR) has strongly outperformed. However, the volatility in the industry can be looking at the last five years.

MOTIF-Airlines-post-5-year-chart

Oil prices have declined roughly 50% only since June 2014, so what were some of the other reasons for such tremendous outperformance over the last two years? One possible reason is the airline industry has consolidated operations, mainly with mergers. These actions have helped increase the efficiencies of the major airlines, reduced the number of competitors, and thereby decreased the overall supply of options for the consumer.

Another reason for the strength of the airlines industry is overall profitability due to strong demand, sticky airfare prices, and lower input costs, which haven’t all been passed down to the consumer.

POSSIBLE INDUSTRY BENEFITS FROM MORE COMPETITION IN AIRLINE MANUFACTURING

Who else benefits when the airline industry is growing? Companies that produce the planes of course. As of today, there are two major players in the commercial airline manufacturing business: Boeing (a U.S. based company) and Airbus (operating in France). Both hold a respectable share of the overall market; Boeing with 43% and Airbus with roughly 41%. However, whether or not Boeing and Airbus continue to dominate the manufacturing space is unknown. There are three new players that are adding to the competition; Embraer (of Brazil), Bombardier (of Canada), and Comac (of China).

It is possible that increased competition in the manufacturing space could lead to lower costs to build, which may help airline carriers become even more profitable. Some of the savings could even be passed onto the consumer, which may then promote further general consumption, increased air travel, and continued economic growth. With more competition, consumers generally win.

WHAT FACTORS IMPACT THE AIRLINE INDUSTRY THE MOST?

There are impacts to take into consideration when considering an investment in the airline industry. For example, some primary influences on the market performance of airlines and industry related securities are:

  • Government regulations
  • Security expenses
  • Fuel prices
  • Competitive dynamics
  • Consumer confidence
  • Manufacturing costs

Amongst these factors, consumer confidence is may be as important as any of them. If potential travelers do not feel safe to fly, passenger traffic declines, as was the case after the 9/11 terrorist attacks. After 9/11, US passenger traffic declined by 5.9% in 2001, followed by another 1.4% in 2002. Revenue fell from $130.2 billion in 2000 to $107.1 billion in 2002 with losses of $19.6 billion reported in 2001 – 2002.

WAYS TO INVEST IN AIRLINES AND TRANSPORTATION

Some suspect that airline profits could soon slow down, while others expect the industry to continue to post profits. Given its volatile performance history, it is common to find polar short-term and long-term opinions from industry pundits. Whatever your beliefs, here are a few motifs that include airline stocks for you to explore:

Taking Flight Motif – This motif invests in Southwest, American Airlines, and United amongst others. In addition to exposure to airline companies, it also includes airport operators, and aircraft leasing companies.

Transporting America – This motif has holdings in airlines, air freight and services, package delivery, and other means of transportation such as trucking and railroads.

On The Road – This travel industry motif includes exposure to airlines as well as hotel REITs, car rentals, online travel portals, and more. Airline holdings include Southwest, JetBlue, and SkyWest.

Modern Warfare – As an alternative, this motif is focused on advanced aerospace, drones, and other modern weapons technology. Political unrest and defense spending can impact the airlines and travel industries. This motif’s holdings include Lockheed Martin, Northrop Grumman, and Raytheon.

In the past, many investors who were interested in investing in airline stocks turned to individual airline stocks and ETFs. Now with Motif Investing, you can invest in a carefully balanced portfolio of stocks that may give investors diverse exposure to investing in the airline sector with our professionally-built motifs. As with all motifs, you also have an opportunity to customize these motifs to suit your needs or build your own from scratch.

  1. Ben
    1 Apr at 12:47 am

    That is a fascinating chart about the price history of the airline industry compared to the S&P. And those economic impacts of airlines are fascinating! I can’t imagine our world without airlines because I travel a lot. I’m particularly interested in budget airlines and the new entrants to the airline manufacturing space.

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