global exposure to commercial airline, aircraft manufacturing, and airport industries based on fundamental and liquidity factors.
Significant restructuring of the airline industry has contributed to the recent success of domestic and international airlines.
Since 2008, carriers have worked to improve their balance sheets by streamlining operations, implementing stricter fuel efficiency standards, and using those cost savings to benefit shareholders. Free cash flow, an important measure of financial performance, is expected to reach new highs across the industry. With greater free cash flow, airlines are able to invest in themselves by upgrading their fleets with more efficient aircrafts, reward shareholders with share buybacks or dividends and provide a better experience for customers.
Thanks in part to better cash flow, the airline industry has experienced a rise of 287% over the past three years ended 04/01/2015, making it the best performing industry within the industrials sector. “Airlines have demonstrated the ‘magic’ financial factor,” Holmes said, “and that is free cash flow.”
While dropping oil prices may have played a part in the airlines’ recent success, many industry leaders began their ascent long before the effects of cheap oil had been felt. Moreover, many carriers hedge their fuel exposure and still have not experienced the benefits of lower fuel costs – airlines’ single greatest operating expense.
The U.S. airline industry alone is expected to see a pretax profit of $3.5 billion in the first quarter versus $700 million a year ago. “It’s easy to forget that between 2005 and 2008, about 70 percent of U.S. carriers were operating under Chapter 11 bankruptcy protection,” said Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors, “but we’ve seen a sea change since then and the benefits of restructuring started showing up in 2013.”
Greater seat density has enabled airlines to improve breakeven load factors, or the minimum number of seats that must be filled to recoup operating expenses. This means that today airlines must fill fewer seats before breaking even. Charges for extras such as checked baggage, priority boarding, Wi-Fi, and extra legroom have also made large contributions to airlines’ bottom lines. Global ancillary (non-ticket) revenue was just $2.45 billion in 2007, but by 2013 it had risen to $31.5 billion.
With JETS, investors will gain exposure to both domestic and international airlines. This strategy allows the fund to dynamically take advantage of the emergence and growth of the middle class in the developing world.
JETS’s construction is intended to provide broad exposure to the universe of companies associated with the business of flying, with an 80% allocation to domestic names (the four leaders being Southwest, Delta, United and American), a 20% allocation to international names ( Japan Airlines, Air Canada, EasyJet, etc.)
JETS is a smart beta, passively managed fund that is designed to track the U.S. Global Jets Index. Candidates for inclusion must be members of the airlines, aircraft manufacturing, or airports & terminal service industries.
The index is rebalanced and reconstituted quarterly. The expense ratio is 0.60%.
About U.S. Global Investors, Inc.
U.S. Global Investors, Inc. is an innovative investment manager with vast experience in global markets and specialized sectors. Founded as an investment club, the company became a registered investment adviser in 1968 and has a longstanding history of global investing and launching first-of-their kind investment products. U.S. Global Investors is well known for expertise in gold and precious metals, natural resources and emerging markets.
Since 1989, U.S. Global Investors has been led by CEO Frank Holmes, who purchased a controlling interest in the company that same year. U.S. Global Investors is a publicly traded company (NASDAQ symbol: GROW) headquartered in San Antonio, Texas.