Trying to profit from airline stocks can be a frustrating and challenging endeavor, even for the most astute investor.
Berkshire Hathaway CEO Warren Buffett has frequently railed against the industry after an investment soured in the late 1980s. That’s because labor issues and price competition kept a lid on profits for quite some time.
But fortunes for the industry have brightened recently, for a couple of reasons.
For starters, the number of U.S. air carriers has shrunk by 33% over the past decade. The industry consolidation has helped the remaining airlines take back pricing power.
At the same time, airlines have become more efficient at putting passengers in available seats. This measure of capacity utilization is known as the passenger load factor.
And this figure has steadily increased to 84% over the past 15 years, as shown in the chart below.
As a result, U.S. passenger airlines collected nearly $14 billion over the past year through June. But despite the improvement in financial conditions, investors remain skeptical of a recovery.
The airline industry trades at a price-to-earnings ratio of only 10.6. By comparison, the S&P 500 Index trades at a price-to-earnings ratio of 20.3.
But with rising airline profits and low valuations, even Buffett is testing the waters once again with a $10 billion position across the industry.
You can profit alongside him with the U.S. Global Jets ETF (NYSE: JETS).
This exchange-traded fund (ETF) provides exposure to the global airline industry along with manufacturers.
U.S. exposure makes up 78% of the ETF. It also has holdings in Europe, Asia and South America.
Research Analyst, Alpha Stock Alert
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