Airline ETF (FAA) Cleared For Takeoff

by on March 12, 2010 | ETFs Mentioned:

Airline stocks have been flying high in 2010 thanks to renewed hopes over an economic recovery, an uptick in business travel, and a stronger dollar. The Claymore/NYSE Arca Airline ETF (FAA) has shot higher on the news, gaining nearly 5% on the week and 15% so far on the year. A slight pullback in oil prices–one of the primary negative factors weighing on the airline industry–has also added momentum to FAA in recent sessions. Ongoing concerns over the financial health of Europe have boosted the greenback, which generally moves in the opposite direction of oil.

Delta's stock takes offAlliance consolidation should also further help to boost revenues, as the world’s biggest airline, Delta, looks for a new partner to assist in the expansion of international travel destinations. Not to be outdone, several of Delta’s chief rivals are also looking to strengthen international operations. “American Airlines, British Airways, and Iberia have taken significant steps toward allaying antitrust regulators’ concerns over their proposed alliance, offering a number of gates at New York’s  John F. Kennedy Airport and London’s Heathrow and Gatwick airports to competitors,” writes Christopher Hinton. These developments could help many airlines open up more international routes, which could translate into increased profits. For many carriers, business and international are the most profitable operations.

Wall Street banks are beginning to take note of the improved outlook for the industry. UBS recently raised its target price on several carriers and Jesup & Lamont Securities forecast a smaller first-quarter loss for Delta. In further good news for Delta, the company raised its operating profit margin forecast for this quarter from 1% to 2% of sales, up from an estimate at the end of January of “break-even.” However, the best sign for investors in Delta was the large uptick in business travelers; ticket volume was up 34% in February compared to last year, producing a 32% rise in corporate travel revenue according to Barron’s.

Inside The Airline ETF

FAA consists of 25 stocks which make up the NYSE Arca Global Airline Index. The index seeks to track U.S. and international passenger airline companies that are listed on developed and emerging global market exchanges. It is heavily skewed towards U.S. airline stocks, with just over three-fourths of the assets going to American firms. Internationally, the fund focuses on developed markets, with roughly 3.5% going to airlines based in France, Germany, and Singapore. The top three individual weights consist of Continental, Southwest, and Delta which each make up roughly 15% of the total portfolio. FAA is up more than 135% over the past year, making it one of the best performers since the market bottom (see the Top Ten ETF Performers Since The Bear Market Lows). FAA charges an expense ratio of 0.65%.


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Disclosure: No positions at time of writing.