Will the Airline ETF Crash on Oil Price Jump?

Airline stocks have been flying low on the bourses this year with the US Global Jets ETF JETS having lost about 8% year to date (as of Jun 1). The first-quarter earnings season was a mixed bag for major airlines, a tick-up in oil prices being a downer.

Oil prices play a crucial role in the airlines’ cost structure. Since crude prices have steady this year as evident from the 9.8% year-to-date jump in WTI crude ETF United States Oil USO, airlines should be on guard.  Probably, this is why global airlines recently cut their forecast for industry profits in 2018.

The International Air Transport Association (IATA) indicated that the industry is expected to register $33.8 billion in profits this year, down 12% from the prior forecast of $38.4 billion. Other factors that led to the guidance cut were increasing interest rates and a spike in geopolitical tensions.

Inside the Looming Crisis

IATA expects oil price to average $70 a barrel this year, up from $54.90 last year and its earlier guidance of $60. Lower-than-expected crude inventory built, U.S. sanctions on Iran and Venezuela and the result of the ongoing OPEC output cut boosted oil prices significantly this year (read: Trump, Tariff & Geopolitics Lead May: 10 Top ETF Stories).

Per IATA, profit forecast for 2018 will likely be 4.1% of about $750 billion sales. Since 4% is not a compelling margin, IATA believes that the industry is in a delicate condition. Moreover, the ongoing trade tensions are another cause of concern as these could result in a drop in passenger count or air cargo. 

Notably, the United States and China announced tariffs on each other. Plus, U.S. tariffs on metal imports from the EU, Canada and Mexico were put into effect on Jun 1, as exemption offered earlier in the year lapsed. Needless to say, the United States now needs to be prepared for a chain of tit-for-tat tariffs on a range of products (read: Trade War Tensions Flare Up: Must-Watch ETFs & Stocks).

Inside Our Earnings Prediction

Against this backdrop, let’s take a look at how key airline stocks’ earnings prediction is shaping up. According to the our methodology, a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) when combined with a positive Earnings ESP increases our chances of predicting an earnings beat, while Zacks Rank #4 or 5 (Sell rated) stocks are best avoided.

United Continental Holdings UAL has a Zacks Rank #3 and an Earnings ESP of -0.11%, indicating lesser chances of beating estimates in Q2.You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Low-cost carrier Southwest Airlines Co. LUV has a Zacks Rank #4 and an Earnings ESP of -1.85%, which diminish the possibility of a beat this quarter.

JetBlue Airways Corporation JBLU has a Zacks Rank #4 and an Earnings ESP of -11.39%, implying that a beat cannot be predicted this quarter.

Delta Air Lines Inc. DAL has a Zacks Rank #3 and an Earnings ESP of +0.53%, indicating reasonable chances of a beat.

American Airlines Group Inc.’s AAL has a Zacks Rank #3 and an Earnings ESP of +2.31%, again showing higher chances of beating estimates.

Alaska Air Group Inc. ALK has a Zacks Rank #3 and an Earnings ESP of +0.36%, implying fair chances of an earnings beat in Q2.

From the afore-mentioned trend, we clearly see that though challenges linger in the space, all airlines do not face heightened risk. Oil prices need to go much higher before posing a serious threat to the industry. In this regard, investors can take a look at the pure-play airline ETF JETS.

JETS in Focus

The $98.8 million-fund holds more than 30 securities in its portfolio and is concentrated on a few individual securities. United Continental (12.84%), Delta Airlines (12.51%), Southwest Airlines (11.21%) and American Airlines (10.78%) are the top four elements in the basket. The product charges 60 bps in fees (see all industrials ETFs here).

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Southwest Airlines Co. (LUV) : Free Stock Analysis Report
 
JetBlue Airways Corporation (JBLU) : Free Stock Analysis Report
 
Delta Air Lines, Inc. (DAL) : Free Stock Analysis Report
 
United Continental Holdings, Inc. (UAL) : Free Stock Analysis Report
 
American Airlines Group Inc. (AAL) : Free Stock Analysis Report
 
Alaska Air Group, Inc. (ALK) : Free Stock Analysis Report
 
US-OIL FUND LP (USO): ETF Research Reports
 
US GLOBAL JETS (JETS): ETF Research Reports
 
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