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Airline ETF and Stocks Set to Fly Higher in 2018

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Acceleration in global economic growth has poised the airline industry to reach new heights, and the International Air Transport Association expects another solid year of performance. This is primarily thanks to strong passenger demand and improvement in the cargo sector.

Airlines across the world are projected to post $38.4 million in profits next year, up 11% from $34.5 million projected for this year. Overall, revenues are projected to to climb to $824 billion from $754 billion expected in 2017.

Regionally, North American carriers continue to be the “powerhouse of industry profitability” with expected profits of $16.4 billion and account for more than half of global profits. European and Asia-Pacific carriers would add $11.5 billion and $9 billion, respectively, to the industry’s profits. Latin America and Middle East carriers are expected to earn $900 million and $600 million, respectively, but airlines in Africa are expected to incur a $100-million loss (read: 6 Europe ETFs Are Top Picks).

Encouraging Fundamentals

The number of people traveling by air is growing by leaps and bounds, reflecting robust demand. Worldwide air passenger numbers are expected to hit 4.3 billion this year and grow further to 4.3 billion in 2018. Solid safety performance and growing employment are adding to the strength.

Demand for air cargo is at its strongest level in over a decade and continues to benefit from a strong cyclical upturn in volumes with some recovery in yields. For 2018, yields, an industry measure of average airfares per passenger per kilometer, are expected to grow 3%.

The solid outlook is backed by high airfares and labor costs. Jet fuel prices are expected to rise faster than oil prices while labor costs have been accelerating strongly and are now a larger expense item than fuel (30.9% in 2018). As such, overall unit costs are expected to increase 4.3% in 2018 versus the expected 1.7% increase in 2017. This will outpace an expected 3.5% increase in unit revenues (read: What's Next for Oil ETFs After Fresh OPEC Output Cut?).

All these suggest good tidings for the airline ETF and stocks. The industry has a solid Zacks Rank in the top 25% and the valuation looks appealing at the current level with a P/E ratio of 12.43 versus 18.63 for the overall transport sector.

Given this, many investors may want to jump on to the space to take advantage of the strong trends. For them, we have highlighted an ETF and a few stocks from this corner to ride on.

U.S. Global Jets ETF (JETS - Free Report)

This fund provides exposure to the global airline industry, including airline operators and manufacturers from all over the world, by tracking the U.S. Global Jets Index. In total, the product holds 33 securities that are heavily concentrated on the top four firms with around 12% allocation each. Other firms hold no more than 4.73% share. The fund has gathered $110.2 million in its asset base while sees a lower trading volume of nearly 59,000 shares a day. It charges investors 60 bps in annual fees but currently has a Zacks ETF Rank #4 (Sell) with a High risk outlook (read: all the Industrial ETFs here).

GOL Linhas Aereas Inteligentes S.A. (GOL - Free Report)

Based in Sao Paulo, Brazil, Gol Linhas provides regular and non-regular flight transportation services for passengers, cargoes, and mailbags in Brazil and internationally. The stock has seen solid earnings estimate revision of 56 cents in the past 90 days for 2018, with an expected whopping earnings growth rate of 126.26%. It sports a Zacks Rank #1 (Strong Buy) and has a VGM Style Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

SkyWest Inc. (SKYW - Free Report)

Based in St. George, Utah, SkyWest operates a regional airline in the United States. The stock saw positive earnings estimate revision of 18 cents for 2018 in the past 90 days and has an expected earnings growth rate of 15.50%. It carries a Zacks Rank #2 (Buy) and has a VGM Style Score of A.

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