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Airlines ETF Stuck Between Revenue & Cost Increases

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As the pandemic is slowly turning into an endemic, economic-reopening-friendly stocks, like leisure stocks, have flied higher. Airlines, hotels and resultants stocks caught attention in recent trading as U.S. Global Jets ETF (JETS - Free Report) has gained about 3% respectively against a 3.5% decline in the S&P 500. But in the past one month, JETS is off 6.4% while the S&P 500 is up 0.7%.

While ebbing pandemic is resulting into higher revenues (due to higher bookings and higher fares), rising costs (mainly due to higher fuel prices) are also casting a pall over the airlines investing. American Airlines (AAL - Free Report) dropped 7.1% on Jun 3 after delivering updated guidance for the second quarter. The company boosted its revenue forecast, as well as its cost forecast per available seat mile. American Airlines said its capacity would be toward the low end of prior guidance, due in part to staffing issues.

Meanwhile, Delta Air Lines (DAL - Free Report) said this month that it expects its revenue to return to 2019 levels (as opposed to its previous guidance of as much as 7% off pre-pandemic levels) this quarter thanks to an uptick in travel demand and higher fares that made up for the surge in fuel costs. Delta also boosted its margin outlook for the second quarter despite higher costs for fuel and other expenses.

Despite high inflation, consumers seem willing to spend more for airline tickets after keeping their travel plans on hold for about two years. The summer season has also been propelling them to indulge on such activities. Several companies are also asking employees to return, which in turn, may push up business travels too to some extent.

But then, one can’t ignore cost pressures. Delta’s schedule trims mean the company now expects its non-fuel costs per seat mile to be up as much as 22% compared with 2019, up from its earlier estimate of a 17% increase. Meanwhile, oil prices are soaring higher.

Brent breached $120-a-barrel level after Saudi Arabia hiked prices for its crude sales in July, indicating a supply crunch even after OPEC+ agreed to increase output in July and August by 648,000 barrels per day, or 50% more than previously planned. As summer driving is gaining momentum and jet fuel demand continues to recover, world oil demand is set to rise by 3.6 mb/d from April to August, per IEA.

Against this backdrop, United Airlines (UAL - Free Report) has lost 9%, ALL has retreated 12%, DAL is off 8.5%, JBLU is down 4.5% while LUV and ALK have nosedived 6.7% and 4.4%, respectively. Revenue expansion is broad-based, only the airline that can manage costs more efficiently will gain in the medium term. If investors are finding it tough to cherry-pick better airline stock, they can always bet on airlines ETF JETS. A basket approach minimizes the stock-specific concentration risks.

JETS in Focus

The underlying U.S. Global Jets Index tracks the performance of Airline Companies across the globe with an emphasis on domestic passenger airlines. American Airlines (10.15%), United Airlines (10.06%), Delta Airlines (9.96%), Southwest Airlines (9.88%) and Alaska Air Group (3.06%) hold the top five positions in the fund. The fund charges 60 bps in fees.