UAL Earnings Boost Airline ETF

by on October 21, 2009 | ETFs Mentioned:

Chicago-based UAL Corp., parent of United Airlines, gave a mix of good and bad news in its earnings report on Tuesday. The company narrowed its third quarter loss to $57 million, a significant improvement from the nearly $800 million loss incurred in the same period last year, but a loss nevertheless. In what is becoming a recurring pattern of this earnings season, United attributed the improvement to cost cutting measures, as opposed to stronger revenues. United noted some early signs of an uptick in air traffic, but said pricing needs to firm and business travel needs to return before it can participate in a recovery.

United Has Given Investors in FAA Some HopeThe struggles of the airline industry over the last twenty years have been well-documented. Multiple bailouts and several close calls with bankruptcy have scared many investors away from this sector completely. Even in a recovery, it appears that airline will lag the rest of the economy. American, Delta, Continental, and US Airways are all expected to report losses in the third quarter this week.

Separately on Tuesday, the Air Transport Association announced that passenger revenue fell 19% in September compared to the same month in 2008, the 11th consecutive monthly decline. Cargo revenues also posted double digit declines versus the year-ago period.The average price for consumers to fly a mile fell 18% in September, evidence of a soft pricing environment and low demand.

But there are reasons to consider an investment in the airline industry. United’s results reflect an effective cost-cutting campaign that may allow the company to ride out the storm until business travel picks up and pricing power swings back towards the airlines. Business travel can’t stay down forever, and if and when it returns, airlines could see big upticks in profitability.

Airline ETF

To say individual airline stocks are a risky investment is like saying the stock market hit a few speedbumps in 2008. But for investors bullish on the prospects of the airline industry, there is an ETF that provides easy exposure without investing heavily in any one name. The Claymore/NYSE Arca Airline ETF (FAA) is one of the more targeted sector-specific ETFs available, investing in international passenger airline companies around the world. FAA has about 25 holdings, led by big weightings towards Delta (16%), Continental (15%), and Southwest (14%).

FAA has almost 70% of its assets in U.S. companies, with the remainder spread primarily across the developed European and Asian markets (such Japan, Germany, Ireland, and the UK). But the fund also maintains some emerging market exposure in the form of Brazilian airline TAM SA.

FAA has an average daily volume of about 15,000 shares and an expense ratio of 0.65%. The fund has gained about 15% since its inception in January of this year, and added almost 1% on Tuesday on renewed hopes for an industry rebound.


Disclosure: No positions at time of writing.