ACDVF - U.S. Global Jets ETF Soars On Strong News From Delta Air Lines

2023-06-28 09:15:59 ET

Summary

• The U.S. Global Jets ETF, which invests in major US and international passenger airline companies, saw unit prices rise by 4.4% on June 27th, bringing its return for the past month to 10.8% and year to date to nearly 18.2%. This growth is largely attributed to a 6.8% increase in shares of Delta Air Lines, the ETF's largest holding, following optimistic projections revealed at the company's 2023 Investor Day.
• Delta Air Lines' management expects air travel spending in the US to return to pre-pandemic levels this year, reaching 1.3% of the country's GDP. They also highlighted the growth of household wealth among high-income travelers, who account for roughly 75% of all air travel spending, and supply constraints in the industry which could allow companies to charge more for their services.
• The airline industry is also expected to benefit from lower fuel costs, with Bank of America raising its forecast for earnings per share across the sector for 2023 due to the expectation that lower fuel costs will boost profits. As a result of the news and my findings, I am assigning a soft 'buy' rating to JETS.

June 27 proved to be a really attractive day for most anybody invested in the aviation space. One particular measure of this industry that focuses on major airlines is U.S. Global Jets ETF ( JETS ). For that day alone, unit prices closed up an impressive 4.4%. That brings its return for the past month up 10.8%, while year to date it is up nearly 18.2%. That nicely outpaces the 14% appreciation that we have seen from the S&P 500. For an industry that has been hammered over the past couple of years and that continues to struggle to some extent, this is quite an impressive feat. But if the most recent data that has come out regarding the space turns out to be accurate, it's not unthinkable that further upside could be around the corner.

A great day backed by solid data

As I mentioned already, unit prices of U.S. Global Jets ETF closed up 4.4% on June 27. Before we get into exactly why this occurred, it would be helpful for those who aren't familiar to know exactly what this ETF is. With 48 holdings in total, the ETF invests in both US and international passenger airline companies, including producers of aircrafts, and airport firms. Given the nature of the industry, the ETF is overwhelmingly focused on the US market. In fact, as of this writing, 73.3% of its holdings by value are US companies. Canada comes in at a distant second place with 6.1%. Outside of North America, its largest exposure is to Japan, accounting for 2.8% of its weighting.

Over the years, the airline industry has become much more consolidated. Even so, the weighted average market capitalization of the components of the ETF is about $17.8 billion. The largest individual holding is Delta Air Lines ( DAL ), which accounts for 10.8% of all holdings at this time. Southwest Airlines ( LUV ) is a close second at 10.6%, while American Airlines Group ( AAL ) comes in third at 10.3%. After the fourth-largest component, which also accounts for 10.3% of all holdings, and happens to be United Airlines Holdings ( UAL ), the concentration of the ETF falls off considerably, with the fifth largest player accounting for only 3.2% of the ETF's weighting. All combined, the top ten largest holdings account for 60.1% of the weighting of the ETF.

Given how much of an impact the largest holdings have on the ETF, a single firm moving in a favorable direction can push unit price is up rather considerably. And it just so happens that, on June 27, shares of Delta Air Lines shot up 6.8%. This move higher seems to have been largely driven by some bullish news revealed at the company's 2023 Investor Day. For starters, management pointed out that, historically speaking, prior to the pandemic, air travel spending in the US amounted to roughly 1.3% of the country's GDP. This number plummeted to only 0.7% in 2020 before climbing over the next couple of years. The estimate is for this number to once again hit 1.3% this year. This makes sense when you consider that the airline industry was hit harder than most any other industry by COVID-19 and now the virus is largely a non-issue these days.

Other interesting data also looks bullish for the space. One area that Delta Air Lines views as important are the high-income travelers since they account for roughly 75% of all air travel spending and since leisure travel tends to be the highest priority purchase for high income households. Since 2019, household wealth amongst this demographic, which management defines as those making over $100,000 per year, has grown by $27 trillion. There is also, management believes, significant supply constraints in the industry as a result of supply chain issues that persist to this day, a tight labor market and limited training resources, and higher costs. This bodes well for companies that already have a sizable footprint in the market, since supply constraints should allow those that do have assets to charge even more for their services.

For the company specifically, there's also optimism that the financial picture will be better both this year and next year than previously anticipated. Prior guidance provided by management for the 2023 fiscal year called for earnings per share to be between $5 and $6. Management now expects this to be at the top end of the range. Free cash flow is now expected to be $3 billion compared to the $2 billion previously forecasted. For next year, the picture is even better. Earnings per share should be in excess of $7, while free cash flow is slated to be north of $4 billion. As you can see in the table below, optimism spread to 9 of the 10 largest components of the ETF. If this seems odd, just keep in mind that the industry is so highly competitive that if one major player is going to do well, the other players should also generate respectable performance.

The presentation provided by management at Delta Air Lines almost certainly did the heavy lifting for the day. But it was not the only positive development. Prior to the company offering up this guidance update, Bank of America raised its forecast for earnings per share across the sector for 2023. This upward revision was driven largely by the expectation that lower fuel costs over the past several weeks should bode well for profits. Considering that fuel costs are one of the most significant cost areas for any company in this space, this should not be a surprise. In fact, in the chart below, you can see how jet fuel prices have been changing so far this year.

The most recent data available covers June 20 of this year. The price per gallon for that day totaled $2.26. That's down almost half from the $4.20 per gallon reported for one year earlier. Even earlier this year, prices were higher. On January 1, for instance, jet fuel costs came out to $3.11 per gallon. And at one point, they came very close to hitting $4 per gallon. This seems to be a general trend in the oil market, with prices declining as US production continues to rise and as concerns mount about the economy more broadly. There is a big part of me that believes that recent declines might be unsustainable. After all, jet fuel inventory levels here in the us totaled 40.9 million barrels in the most recent week. That's almost the same as the 40.7 million barrels reported the same time last year.

Takeaway

All things considered, I think that the move higher in U.S. Global Jets ETF is fascinating to watch. Favorable news when it comes to the largest component of the ETF should bode well for the rest of the players in the space. In addition, lower fuel costs, at least for now, should help the industry from a profit and cash flow perspective. It is true that a broader economic downturn would hurt this space. But any such downturn would almost certainly be short lived. For these reasons, I am cautiously optimistic about the ETF and I believe that it makes for a soft 'buy' candidate at this time.

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