Market Overview

Airline ETF: A Cash Flow Destination

Airline ETF: A Cash Flow Destination

The US Global Jets ETF (NYSE: JETS) deserves some credit. Last year, oil, the largest input cost for airlines, was one of the best-performing commodities, but the lone dedicated airline exchange-traded fund is up more than 16 percent over the past year.

Airlines Fly Into Focus

Airline stocks, including some of the major holdings in JETS, are surprising in another way: They are becoming credible on the shareholder rewards front. While airline dividend yields are still paltry, data suggest the industry's commitment to shareholder rewards, mainly buybacks with some dividend growth, is increasing.

The underlying index for JETS, the U.S. Global Jets Index, “uses a smart beta strategy to track the global airline industry. The index uses fundamental screens to determine the most efficient airline companies” according to US Global.

What's Happening In The Sector?

Although oil prices rose last year, major U.S. airlines continued the recent trend of impressive cash flow generation.

“Lower fuel prices represented a huge windfall for the airline industry. Delta Air Lines alone netted $5.1 billion in savings. As a whole, U.S. carriers retained between 50 and 75 percent of fuel cost savings, says Credit Suisse, and with crude oil at 13-year lows, they can expect to hang on to a similar percentage this year,” according to US Global research.

According to the International Air Transport Association (IATA), airline industry profits rose to $33 billion in 2015, nearly doubling from $17.4 billion the previous year and are expected to top $36 billion for 2016.

Rising profits and increased free cash flow make Warren Buffett's recent airline bet, his first in decades, look all the more prescient. In November, it was revealed that Berkshire Hathaway Inc. accumulated stakes in three of the top four holdings in JETS. That trio represents about 37 percent of the ETF's lineup.

“In 2015, more than $10 billion—about 7 percent of U.S. airlines’ market cap—was returned to shareholders in the form of stock buybacks and dividends. That’s double the amount from 2014,” according to US Global research.

Last month, Bank of America Merrill Lynch raised its price targets on five marquee holdings in JETS. JETS turns two in late April and has $65.6 million in assets under management.


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