Should You Invest in an Airline ETF?

ETFs, or Exchange Traded Funds, are essentially composed of stocks, bonds, or other investment options. They are similar to mutual funds, but have more open options because they trade like stocks. This means you can access your portfolio, as well as buy or sell it during normal trading hours, unlike mutual funds. More importantly, unlike mutual funds, there is no fund manager to handle your investment plans – you are in charge of buying or selling a stock whenever you like, and your funds are immediately credited or debited to your account. Because of this, ETFs cost less.

Airline ETFs have been gaining ground recently as a good investment option. There are several bases for this. First, the air traffic is steadily going up, both for passenger and cargo, increasing by up to 9.5% for passenger and 26.5% for cargo in February of 2009 alone. This means more profits for investors. And despite a 2.9% decrease in air traffic for US passengers, the total revenue has grown by 5% (2009), pointing to a recovery. This may be interpreted as a sign that more passengers are willing to spend in air travel even in times of recession. Mergers of different airlines also helped boost confidence in their value as well.

However, between low-fare and higher-fare carriers, the low-fare carriers seem to be a better investment. This is due to several factors, such as fuller planes (more passengers), lower fuel prices, and more equity being raised, which encourages investors. In comparison, higher-fare carriers have experienced more overall traffic, or more trips (about 11.7%), but decreased capacity, or less passengers (about 7.7%). These points to a decreasing demand for major carriers over the past years.

With regard to airline ETFs however, it is the inherent volatility of the airline market which promotes trading. For example, mergers between airlines such as United Airlines and Continental Airlines will produce a more stable, world-class airline, and will create a low-cost competition. However, some airlines have already raised billions of dollars worth of debt, and some investors fear potential bankruptcy filings. This opens up many speculations on whether some airlines can still show profits. Further adding to the market’s uncertainty is fuel prices. Rising fuel costs can mean lower airline shares, but this relationship is not inversely proportional, because airlines have other costs such as labor, and use financial tools to hedge against rising oil prices.

In consideration to all this, airline ETFs are a good investment for the short term, for the investor who likes to move in or out minute by minute or day by day. The volatility in this industry promotes quick participation, but this same uncertainty makes long-term investment in airline ETFs a little questionable, and is certainly not for the passive investor.