Investment Thesis
U.S. Global Jets ETF (NYSEARCA:JETS) is a hold due to the multiple issues facing top airlines’ ability to maintain and increase profitability. Despite strong demand for air travel, several limiting factors exist for the industry, including union actions and increased fuel and labor costs. These factors will impede further growth and profitability, reducing the return on investment for JETS. Finally, JETS has a relatively high expense ratio with no dividend yield.
Fund Overview and Compared ETFs
JETS is an ETF that seeks to track the U.S. Global Jets Index. This index uses a combination of fundamental metrics to capture the most efficient airline companies. With its inception in 2015, the fund has 50 holdings and $1.12B in AUM. While other ETFs exist that capture the broader transportation industry, JETS is the most concentrated on airline-specific holdings. The fund includes predominantly U.S. airlines, but also includes international airlines like Air Canada (XTSE:AC), Japan Airlines (TYO:9201), and Air France (XPAR:AF).
Due to a lack of pure airline ETFs, other funds examined are transportation funds that include large U.S. airlines. These are Defiance Hotel, Airline, and Cruise ETF (CRUZ), First Trust Nasdaq Transportation ETF (FTXR), and SPDR S&P Transportation ETF (XTN). CRUZ has only existed since June 2021 but was selected as it includes a mix of airline (42.18% weight) and travel-related holdings. FTXR is the least concentrated on the airline industry at just 14.79% weight, but also includes auto, rail, and marine transportation for comparison against JETS. Finally, XTN has 25% weight on passenger airlines, but was included for comparison as it includes air freight, rail, and passenger transportation.
Comparing ETFs: Performance, Expenses, and Dividend Yield
JETS has seen the worst performance of compared funds with a 5-year compound annual growth rate of -7.89%. CRUZ was initiated in June 2021 and has seen an average annual return of -2.99% since its inception. FTXR has seen the best 5-year performance with an average return of 8.18%. However, this fund has the least weight on the airline industry. XTN has seen a 7.59% 5-year average return. Despite strong airline traffic demand, JETS is still down almost 40% from its pre-COVID price level. I will cover a few reasons that explain this later along with reasons why downward pressures will persist.
In addition to a negative price return, another downside for JETS is its high expense ratio. At 0.60%, JETS ties FTXR for the most expensive fees. Additionally, JETS is the only ETF compared with no dividend yield. A key factor impacting this lack of dividends is the low profitability for major airlines, which I will also discuss later.
Expense Ratio, AUM, and Dividend Yield Comparison
JETS |
CRUZ |
FTXR |
XTN |
|
Expense Ratio |
0.60% |
0.45% |
0.60% |
0.35% |
AUM |
$1.12B |
$28.80M |
$37.32M |
$164.84M |
Dividend Yield TTM |
N/A |
1.12% |
1.27% |
0.89% |
Dividend Growth 5 YR CAGR |
N/A |
N/A |
9.17% |
-0.65% |
Source: Seeking Alpha, 7 Jul 24
JETS Holdings and Key Concern Factors
The “big four” U.S. airline companies, Southwest (LUV), American (AAL), Delta (DAL), and United (UAL) dominate JETS at almost 40% combined weight. Additionally, the fund is fairly concentrated with 58% weight on its top 10 holdings. While other compared funds incorporate the broader transportation industry, all of them include at least one of these major U.S. airlines or cargo airlines such as FedEx (FDX) or UPS (UPS).
Top 10 Holdings for JETS and Compared Transportation Funds
JETS – 50 holdings |
CRUZ – 55 holdings |
FTXR – 41 holdings |
XTN – 44 holdings |
LUV – 10.23% |
MAR – 8.25% |
TSLA – 9.88% |
FDX – 3.12% |
AAL – 9.84% |
HLT – 8.24% |
FDX – 9.36% |
MATX – 2.88% |
DAL – 9.62% |
RCL – 7.77% |
GM – 9.00% |
JBLU – 2.87% |
UAL – 9.29% |
DAL – 7.27% |
F – 8.18% |
SKYW – 2.83% |
SNCY – 3.49% |
CCL – 5.51% |
UPS – 7.29% |
KNX – 2.81% |
JBLU – 3.27% |
RYAAY – 4.44% |
DAL – 4.32% |
JOBY – 2.77% |
SKYW – 3.25% |
IHG – 3.87% |
UAL – 4.10% |
ODFL – 2.76% |
SAVE – 3.14% |
UAL – 3.39% |
URI – 3.62% |
KEX – 2.75% |
AC CN – 3.08% |
LUV – 2.89% |
PCAR – 3.58% |
CHRX – 2.74% |
ALK – 3.01% |
SIA SP – 2.50% |
UNP – 3.52% |
CSX – 2.73% |
Source: Multiple, compiled by author on 7 Jul 24
Looking forward, there are both positive and negative factors impacting the airline industry. While demand for airline travel is expected to continue rising, airlines face profitability challenges. These profitability challenges stem from rising fuel and labor costs. Additionally, other headwind factors such as union actions and accidents from Boeing’s (BA) string of safety issues persist.
Air Travel Demand Outlook
A positive factor for airline profits is the increase in air travel demand. Despite plummeting demand during the pandemic, the average daily passenger volume through airport TSA checkpoints finally reached 2019, or pre-COVID levels, in summer 2023. Looking forward, this trend is expected to continue. North American intraregional air traffic is expected to grow 27% through 2030. Internationally, the growth forecast is even greater with Europe and Asia expecting 30% and 59% intra-regionally for each region, respectively.
This increase in travel demand is already producing a positive impact to top U.S. airline carriers. Delta Air Lines reported very strong earnings earlier this year, including a 7.8% in Q1 YoY revenue. Delta also expects revenue growth of 5% to 7% to continue. Despite an increasing forecast in global air passenger traffic, airlines still struggle with profitability due to multiple factors.
Why Do Airlines Struggle with Profitability
Major airline companies notoriously struggle with profitability. This can be seen in the net income margins for the top four airlines that dominate JETS top holdings. UAL, DAL, and AAL all have relatively low net income margins at 4.90%, 8.48%, and 1.56%, respectively. By comparison, the average S&P 500 company has a net profit margin of about 11%.
There are multiple reasons why airlines struggle with profitability. Rising operating expenses are the most obvious culprit. Of these costs, labor costs account for 31% of operational expenses. Delta recently announced that pilot salaries will increase 34% over the next four years. Other airlines are seeing similar increases to remain competitive with each other. While there has been some discussion of reducing the cockpit requirement down to a single pilot in the future, Delta and United Airlines contractually prohibit single pilot operations currently.
The second-greatest expense, at 22% of operational expenses, is fuel and oil. While aviation fuel has only seen modest increases in prices over the past couple years, as shown in the figure above, airlines must tackle the conversion from fossil fuels to sustainable aviation fuel. Delta Airlines laid out a plan to transition to at least 95% of its fuel consumption from sustainable fuels by 2050. However, this transition faces significant challenges, including the demands on cropland if these sources come from corn or soybeans. One estimate puts 19% of the world’s cropland needing to be devoted to biofuels to satisfy global air demand. The transition away from fossil fuels will be challenging and costly for airlines.
Ancillary Factors: Unions and Accidents
To add to major airlines’ costs, the unionization of its employees also impacts their bottom line. Just earlier this month, Alaska Air Group (ALK) flight attendants negotiated a 32% pay increase. Other union actions have increased pay for pilots and flight attendants at other airlines as well.
Accidents and maintenance issues have also plagued airline profitability. The Alaska Airlines panel blowout on January 5th of this year also heightened public concern over air travel. While the panel blowout did not have a significant impact on passenger travel demand, it resulted in grounding Boeing planes, which hurt airline profitability. United Airlines, for example, reported a $124 million loss in one quarter following the January 2024 incident.
Current Valuation
All compared funds have struggled for positive price performance over this past year. JETS saw an -11.8% return, the worst of compared ETFs. Furthermore, the ETF never reclaimed the share price it saw just before the COVID pandemic of approximately $32 per share.
Due to each ETF’s recent performance, it comes as no surprise that JETS has the most attractive price-to-earnings and price-to-book ratios. At 9.18, JETS is significantly below compared funds and the overall U.S. market, as measured by the S&P 500 Index. Despite a high P/E for Southwest at 41.9, other top airlines such as United stand at a very low 5.81.
Valuation Metrics for JETS and Peer Competitors
JETS |
CRUZ |
FTXR |
XTN |
|
P/E ratio |
9.18 |
12.63 |
12.36 |
15.55 |
P/B ratio |
1.17 |
2.40 |
2.23 |
1.93 |
Source: Compiled by Author from Multiple Sources, 7 Jul 24
Looking forward, I do not see the relatively low P/E and P/B for JETS as reason to buy. Even if air traffic demand increases as expected, the industry has shown that it struggles to maintain profitability. Additionally, there are a multitude of reasons why air traffic demand could be derailed, as discussed below.
Risks to Investors
A final concern factor for JETS is the inherent volatility of the airline industry. During the COVID pandemic, JETS lost approximately 60% of its value. Recessions also hit airlines particularly hard due to reduced travel demand. In 2007-2008, American Airlines saw a price drop from $58 down to less than $3. During this timeframe, UAL saw a price drop from $40 down to less than $4. Due to a variety of factors, American Airlines declared bankruptcy in 2011, Delta declared bankruptcy in 2005, and United declared bankruptcy in 2002. Even Southwest Airlines, which has been seen as a survivor in the industry, reported its first loss in 48 years due to COVID. Therefore, economic recession, terrorism, and global disruptions all present risk factors in addition to profitability concerns.
Concluding Summary
All things considered, the main positive factor for JETS is its relatively attractive valuation. However, an attractive valuation is not enough to warrant a buy rating for the fund. Despite the expected increase in airline travel demand, top U.S. airline companies will continue to struggle for profitability due to the transition to renewable fuel sources, labor costs, union actions, and the ever-present possibility of global disruptive events. These factors increase risk for the airline industry, and therefore JETS.