Airline Industry ETF

What Is an Airline Industry ETF?

An airline industry ETF is a sector exchange-traded fund (ETF) that invests in the stocks of airline companies, so as to obtain investment results that correspond to those of an underlying airline index.

In reality, because of the very limited number of airlines in most nations, most ETFs associated with airline stocks also include other means of transportation, such as rail and marine.

Understanding an Airline Industry ETF

Airline industry ETFs are a way to invest broadly within the airline industry, but they aren’t all created equal.

Investors who are considering investing in airline companies, or any sector, should become familiar with the metrics that can help them determine the profitability and efficiency of companies within that sector. For airline companies, two key metrics are available seat miles (ASM) and revenue per available seat mile (RASM).

ASM is a measurement of a flight's ability to produce revenue; it measures the number of seat miles that can be sold on a particular aircraft: its carrying capacity. Seat miles are calculated by multiplying the miles an airplane will fly on a specific trip by the number of seats available for sale on that trip.

ASM is a crucial metric for investors as it allows them to identify airlines that are able to produce the most revenue. When some seats remain empty on a flight, the airline's ASM is below capacity. Over time, a pattern of empty seats on a particular airline proves very costly to the company.

RASM is a metric that analysts and investors use to assess the efficiency of an airline. The RASM is calculated by dividing the operating income by the ASM.

A larger RASM tends to indicate higher profitability for the airline. Notably, the revenue is not only limited to ticket sales; it includes other influences such as profitability and efficiency.

Types of Airline Industry ETFs

When people think of airlines, they most always think of passenger airlines. However, airline stocks can include those of companies in the airline business but not specifically an airline company.

These can include stocks that provide services to airlines, such as catering companies, logistical planning companies for airlines, and even airlines that aren't necessarily passenger airlines, such as freight airlines.

Note that there are other ETFs that incorporate airlines in their investment portfolio along with non-airline companies. For example, transportation ETFs, in addition to holding airline stocks, hold rail stocks and marine stocks.

Advantages and Disadvantages of an Airline Industry ETF

Advantages

There are compelling reasons why an airline industry ETF could make sense for investors looking to capitalize on growth trends in transportation.

Firstly, ETFs are passive investments that don't require the fund manager to take significant investment action or come up with alpha strategies. An ETF simply tracks an index by picking stocks in that index. As such, ETFs have low turnover and low expense ratios, making them an affordable investment option.

People will always travel, whether that be for personal reasons or business, and mail and cargo will also always need to be delivered internationally. Airlines aren't going anywhere and as developing economies continue to increase their wealth, even more people will be traveling who couldn't afford to before.

The International Air Transport Association (IATA) expects around $25.7 billion of net profit in 2024 with a net profit margin increase of 2.7% from 2023 to 2024. This prediction is based on 4.7 billion people expected to travel, breaking the pre-pandemic record of 4.5 billion noted in 2019.

Disadvantages

The airline industry is susceptible to a number of factors that can affect demand for air travel; these include economic downturns, terrorism, and inclement weather. An airline ETF may underperform at such times, as well as when fuel prices are surging, since the cost of aviation fuel has a major impact on airline profitability.

The performance of airlines is heavily dependent on the behavior of consumers as the primary use of airlines is for passenger travel when people take vacations. Taking a vacation is a luxury and not a necessity, so when the economic atmosphere shifts from one of spending to one of saving, airline stocks will suffer.

Investing in Airline Industry ETFs

Below are ETFs with exposure to airline stocks:

• U.S. Global Jets ETF (JETS)
• SPDR S&P Transportation ETF (XTN)
• iShares Transportation Average ETF (IYT)

The Bottom Line

Airline ETFs are investment funds that typically track the performance of a basket of airline industry-related stocks. Investors in airline ETFs aim to gain exposure to the aviation sector, including major airlines, aircraft manufacturers, and related service providers. Note that like other forms of market cycles, investors of airline ETFs may experience ebbs and flows that tie to economic cycles and consumer preferences.