The Highflying Investment Consumers Love to Hate

Sean Brodrick
by Sean Brodrick, Resource Strategist, The Oxford Club Market Trends Market Trends
profit from airlines

I’m writing this at 4:16 a.m. in the Miami International Airport.

I’m about to embark on a journey to investigate two gold/silver mines in Mexico. And I have an investment idea for you.

But it isn’t a gold mine.

In fact, it’s something many people hate. And yet, consumers throw more and more money at it every year...

Back to that in a second. First, a question...

Have you ever sat in an airport at 4 a.m.?

It’s an interesting experience. For one thing, they keep the lights very low. I guess they figure that if you’re there that early, you must be part bat.

There may be something to that, since my travels actually started last night.

Due to heightened security measures, airlines are now suggesting you arrive three hours ahead of international flights. Since my flight leaves at 7 a.m. and I don’t live near Miami, I decided yesterday that I would spend the night at the Days Inn near the airport.

A lot of people would have regretted that decision. Upon entering my room, I nearly tripped over a pile of leaflets left under the door by a local pizza chain. The carpet looked to be hiding lots of bad life decisions. And the A/C unit banged furiously.

But I didn’t let it get me down...

Because I’ve been in the airport at 6 a.m. when the TSA lines get inexplicably long and all you can do is watch as the odds of making your flight dwindle. I wasn’t going to risk missing out on my gold prospecting adventure.

And as depressing as that hotel room may have been, it’s not the most depressing experience I’ll have today. Because today I’ll experience the “magic” of commercial aviation.

Twice.

Smaller Seats, Greater Profits

How can we describe the horrors of modern American air travel in a way that future people will understand? As they look back across the centuries, I’m pretty sure future anthropologists will not understand why we did it.

Why do we put up with being squeezed into seats that get less roomy as airline profits go up?

Why do we agree to pay every outlandish charge that airline execs dream up?

And why do we swallow boarding delays that stretch longer every danged year?

Anyway, here I sit, waiting for Starbucks to open at 5 a.m. (That’s the rumor, anyway, passed through a small huddle of caffeine addicts idling nearby.) The crazy thing is...

Despite the gripes I just listed, I’m actually looking forward to my trip.

In fact, I’m looking forward to multiple trips I’ll take this summer. With the gold bear market over, there are some great mines and properties out there just waiting to be inspected.

I’m not the only one, either.

The Good Times Are Far From Over

Millions and millions of travelers will take to the skies this summer. Here are some facts...

  • The average fuel bill for airlines dropped by a third in the first quarter of 2016. Sure, oil prices have gone up since then. But not that much. There is still plenty of room for profits. In the interim, many airlines have refinanced debt and profits to pay down loans.
  • Air travel is expected to reach an all-time high this summer. That’s according to a report from Airlines for America.
  • Over the three busiest summer months, about 2.51 million people will fly each day. That’s up 4% from last year.
  • S. airlines are busily adding new flights. In addition, Delta Air Lines (NYSE: DAL), American Airlines (Nasdaq: AAL) and others are working to increase the number of seats available.

We have an opportunity here because airlines got into a bit of a price war in March. The average fare per mile was down 6% from early 2015. That made everyone think the good times were over.

But for semi-monopolies like the airlines, price wars can be fixed with a wink and a nod.

Passenger revenue per available seat mile - a metric commonly used to judge airline profitability - will bottom out soon. American and United Continental (NYSE: UAL) say higher profits might not come until 2017. Delta and Southwest (NYSE: LUV) are optimistic about the second half of the year.

In fact, U.S. airfares rose 1% in April from March. At the same time, fares rose 0.4% year over year.

And you know those pesky baggage and ticket-change fees? Customers may hate them, but they generate about $1.1 billion more for airlines than they did in 2010.

So, how can you play it?

Cleared for Takeoff

For one thing, you can buy individual airlines. Delta and Southwest are two of my favorites. But you can own both - and several other major airlines - as part of the U.S. Global Jets ETF (NYSE: JETS).

profit from airlines

Looking at the chart, you can see that the Jets ETF is about 14% off its recent highs. But it also looks to be putting in a bottom.

I think it’s been cleared for takeoff.

The fund launched in April of last year, so it’s relatively new. Its total net asset value is roughly $52 million. And it has an expense ratio of 0.60%.

The thing I like most about the Jets ETF, though, is how it closely tracks airline industry performance. We saw it dip with fears over the recent price war and longer TSA lines.

But the airlines are taking steps to cut those lines. And price wars in the skies never last.

With that, I’m off. I have flights to board and mines to explore. I know millions of other people will be joining me in the sky today. Which is a great reason why you should take a look at this sector.

Good investing,

Sean

Have thoughts on this article? Leave a comment below.

P.S. If you're getting the itch to skip town for a few days, consider joining me at The Oxford Club's Private Wealth Seminar in Chicago, September 7-8. There I'll be joined by my colleagues Alexander Green, Marc Lichtenfeld, Steve McDonald and Matthew Carr. Plus: Stanley Gibbons' Geoff Anandappa, Early Investing co-founder Adam Sharp, Beyond the Dollar editor Karim Rahemtulla and more. For event details, click here.

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