Advisors in Focus- March 14, 2021

Dear Advisor,

Where were you one year ago today?

I was reluctantly canceling a family vacation while simultaneously masking up before getting two weeks worth of groceries. 

As we’ve seen it play out in the past year, the devastation of the pandemic didn’t just come in the form of canceled trips for the airline industry. Hefty balance sheets and impacted operations led investors to the exit, including Warren Buffet who on May 4th, 2020 conceded that “the world has changed” and divested from several of his airline sector positions including Delta Airlines (DAL).

Investing Channel’s TrackStar data reflects advisors interest in the group as the U.S. Global Jets ETF (JETS) remains a top search. In today’s Advisors in Focus we take a closer look at the ETF to see if there is further upside to its current cruising altitude.

The world has indeed changed, from hunkering down to finally seeing a light at the end of a dark travel tunnel. Over the past year, the stock performance by airlines reflects the path of a landing and takeoff. 

TrackStarIQ Data

Here are some highlights from ETF searches this week –

Rank	TOP ETFs BY ALL FAs (Total Traffic) Last Week	Ticker	TOP ETFs BY FAs w/ AUM >$1 bln (Total Traffic) Last Week	Ticker	TOP ETFs BY RETAIL (Total Traffic) Last Week	Ticker
1	SPDR S&P 500 ETF	SPY	VanEck Vectors Gold Miners ETF	GDX	SPDR S&P 500 ETF	SPY
2	Invesco QQQ	QQQ	SPDR S&P 500 ETF	SPY	Invesco QQQ	QQQ
3	ARK Innovation ETF	ARKK	Invesco QQQ	QQQ	ARK Innovation ETF	ARKK
4	First Trust ISE Cloud Computing Index Fund	SKYY	iShares Russell 2000 ETF	IWM	ProShares UltraPro QQQ	TQQQ
5	iShares Silver Trust	SLV	U.S. Global Jets ETF	JETS	MicroSectors FANG+? Index 3X Inverse Leveraged ETN	FNGU
6	VanEck Vectors Gold Miners ETF	GDX	Timber Pharmaceuticals Inc	TMBR	Direxion Daily Semiconductor Bull 3x Shares	SOXL
7	ProShares UltraPro QQQ	TQQQ	IT Tech Packaging Inc	ITP	ProShares Ultra VIX Short-Term Futures	UVXY
8	ARK Fintech Innovation ETF	ARKF	S&P 500 Technology Sector SPDR	XLK	iShares Russell 2000 ETF	IWM
9	SPDR Gold Trust	GLD	iShares Global Clean Energy ETF	ICLN	ARK Fintech Innovation ETF	ARKF
10	ProShares Ultra VIX Short-Term Futures	UVXY	ETFMG Alternative Harvest ETF	MJ	ProShares UltraPro Short QQQ	SQQQ
11	Energy Select Sector SPDR Fund	XLE	ARK Innovation ETF	ARKK	Energy Select Sector SPDR Fund	XLE
12	Financial Select Sector SPDR Fund	XLF	iShares MSCI Emerging Markets ETF	EEM	VanEck Vectors Semiconductor ETF	SMH
13	ARK Web x.0 ETF	ARKW	iShares Core S&P Small-Cap ETF	IJR	iShares 20+ Year Treasury Bond ETF	TLT
14	U.S. Global Jets ETF	JETS	Energy Select Sector SPDR Fund	XLE	ARK Genomic Revolution ETF	ARKG
15	Global X Lithium ETF	LIT	S&P Small-Cap Ishares Core ETF	IJR	Technology Select Sector SPDR Fund	XLK
16	iShares Russell 2000 ETF	IWM	Advisorshares Pure Cannabis ETF	YOLO	iShares Silver Trust	SLV
17	ProShares UltraPro Short QQQ	SQQQ	S&P 500 Energy Sector SPDR	XLE	SPDR Gold Trust	GLD
18	VanEck Vectors Semiconductor ETF	SMH	S&P 500 Financials Sector SPDR	XLF	Invesco Solar ETF	TAN
19	SPDR Dow Jones Industrial Average ETF	DIA			SPDR Dow Jones Industrial Average ETF	DIA
20	iPath Series B S&P 500 VIX Short-Term Futures ETN	VXX			VanEck Vectors Gold Miners ETF	GDX

The group witnessed an emergency landing in late February/early March of 2020. 

The cost of airplanes, fuel, and airport use is front-ended. The toll of running the business model comes in the beginning. Airlines raise debt to cover these costs. They generate revenue through operations to cover debt expenses. Flight restrictions limited their ability to maintain these balance sheets.

Airline stocks hit near lows until mid-May. Investors started to build positions in the early part of summer as pandemic conditions eased. The sector remained volatile in the back-end summer months. 

JETS accelerated higher in November as the re-opening trade heated up around vaccine headlines. The rally was underway.

Fast forward to today. The JETS ETF finds itself testing key resistance levels. The 200 weekly moving average, a key gauge for long-term trends, sits at $27.68. If it can edge above this resistance it could test the $29-32 area. This is the level JETS maintained pre-pandemic. 

Investors need to watch the test of these resistance levels this week. On Monday, three key airline companies, Delta (DAL), United Airlines (UAL), and American Airlines (AAL) present at the J.P. Morgan Industrial Conference. Commentary on the linearity of recovery will be a key driver for this momentum trade. 

What is the JETS ETF?

JETS provides investors access to the global airline industry. The ETF includes airline operators and manufacturers around the globe. The ETF emphasizes domestic passenger airlines. 

U.S. Global screens airlines for investability- the stock must be listed on a security exchange- a minimum market capitalization of $100 million, and liquidity (minimum average daily value traded). This ensures the fund tracks the largest players in the industry.

The top four holdings (AAL, UAL, LUV, and DAL) represent 42% of the fund. The weighting of the top four largest domestic airlines is by design. Market Capitalization and passenger load factors are the primary factors. Passenger load factor (“PLF”) measures how much of an airline’s passenger carrying capacity is used. 

Why PLF is important:  

PLF is a critical measure of efficiency from a management perspective. Airlines decide pricing, capacity, and frequency of flights based on this metric. 

Here is how it works:

Delta operates a Boeing 737 between New York and Chicago. The plane holds 200 passengers. The revenue passengers for the route is 150.

Load Factor equals the number of carried passengers (150) multiplied by the distance (Let’s say 500 miles) divided by available seats (200) multiplied by the distance (500). We multiply this final number by 100 to create a percentage.

• 150 passengers x 500 miles traveled = 75,000 divided by 200 passengers X 500 miles travelled = 100,000. 
• This equates to a PLF of 75%.

As previously mentioned, the top four weightings in JETS make up 40% of this ETF. The next five largest U.S. or Canadian airlines each receive a 4% weighting. Spirit Airlines (SAVE), JetBlue (JBLU), Alaska Air (ALK), and Allegiant Travel (ALGT) represent this group.

U.S. Global expects the fund will track 30-35 companies based on criteria. 

The expense ratio, the amount an investment company charges investors to manage the fund, is 0.60%. If you invest $10,000 in the fund at this expense ratio, then your management fee would be $61 after one year, $192 after three years, $335 after five years, and so on and so forth. The expense ratio is a little high for a passive fund but generally in line with ETFs.

Advisors in Focus take a closer look at the top four holdings.

American Airlines (AAL)

• Market Capitalization- $15.53 billion
• Q4 Passenger Load Factor- 64.1% compared to 83.8% in the prior-year period
• Q4 revenue declined 64% year-over-year to $4.0 billion. The sales decline improved from the 73% drop in Q3. The improved linearity boosts confidence in the re-opening trade.
• Fiscal Year 2020 net loss was $8.9 billion or $18.36 per share.
• Liquidity- AAL ended 2020 with approximately $15 billion in total available liquidity. It reduced its daily cash burn rate from nearly $100 million in April 2020 to approximately $30 million in Q4. AAL raised more than $13 billion in 2020 through various equity and debt offerings.
• CEO Doug Parker presents at the J.P. Morgan Industrials Conference on Monday, March 15 at 10:30am ET.
• Shares of AAL trade at $23.37, up approximately 103% since early November. AAL was consolidating in the $26-30 level before the pandemic slammed the airlines.

Southwest Airlines (LUV)

• Market Capitalization- $35.52 billion
• Q4 Passenger Load Factor- 53.8% compared to 83.1% in the prior-year period. LUV expects the January and February PLF to be in the range of 50-55%.
• Q4 revenue declined 65% year-over-year to $4.0 billion.  Revenue fell 68% year-over-year in the third quarter. This marks a sequential improvement in the rate of tope line deceleration.
• Fiscal Year 2020 net loss was $3.07 billion or $5.44 per share.
• Liquidity- LUV ended 2020 with approximately $14.3 billion in total available liquidity. Average daily cash burn was approximately $12 million in Q4. LUV projects an average daily cash burn of $17 million per day as rising fuel costs weigh on the metric.
• On the January 28 earnings conference call, CEO Gary Kelly stated, “While vaccine availability should mark the beginning of the end of this pandemic, current passenger booking trends do not indicate significant improvement through March 2021. In response to current trends, our capacity plans remain conservative through, at least, March 2021, and we will continue to monitor bookings and adjust flight activity, accordingly. While we hope to achieve cash burn break even in 2021, it is wholly dependent upon a substantial rebound in passenger traffic and revenue; and, it is difficult to predict the timing of such a rebound, especially with respect to business travel. In order to achieve cash burn break even, we continue to estimate operating revenues will need to recover to a range of 60 to 70 percent of 2019 levels, which is roughly double current levels”. 
• Shares of LUV trade at $61.03, up approximately 48% since early November. LUV trades at a 28-month high at the time of this writing.

United Airlines (UAL)

• Market Capitalization- $18.47 billion
• Q4 Passenger Load Factor- 55.6% compared to 82.5% in the prior-year period. LUV expects the January and February PLF to be in the range of 50-55%.
• Q4 revenue declined 69% year-over-year to $3.4 billion.  UAL forecast a Q1 revenue decline of 65-70%. UAL noted an accelerated distribution of the vaccine could lead to faster improvement.
• Fiscal Year 2020 net loss was $7.07 billion or $25.30 per share.
• Liquidity- LUV ended 2020 with approximately $19.7 billion in total available liquidity. It raised $26 billion in liquidity in 2020. Average daily cash burn was approximately $33 million in Q4 which includes debt principal payments and severance. Core cash burn, a metric that captures operational performance, improved to $19 million in Q4 compared to $38 million in Q2. UAL ended the year with $24 billion in long-term debt.
• UAL CEO Scott Kirby presents at the J.P. Morgan Industrial Conference on Monday March 15 at 9:40am ET. 
• Shares of UAL trade at $56.29, up approximately 60% since early November. UALtraded in the mid-$80s pre-pandemic. A bloated balance sheet remains the primary headwind for UAL.

Delta Airlines (DAL)

• Market Capitalization- $32.31 billion
• Q4 Passenger Load Factor- 42% compared to 86% in the prior-year period. DAL expects the January and February PLF to be in the range of 50-55%.
• Q4 revenue declined 69% year-over-year to $3.5 billion. The top-line decline improved from a deceleration of 79% in the third quarter. DAL forecast a 60-65% revenue decline for the March quarter.
• “We see three distinct phases in 2021.  The early part of the year will be characterized by choppy demand recovery and a booking curve that remains compressed, followed by an inflection point, and finally a sustained demand recovery as customer confidence gains momentum, vaccinations become widespread and offices re-open,” said Glen Hauenstein, Delta’s president.
• Fiscal Year 2020 operating loss was $12.46 billion or $19.49 per share.
• Liquidity- DAL ended 2020 with approximately $16.7 billion in total available liquidity. It raised $26 billion in liquidity in 2020. Average daily cash burn was approximately $12 million in December. This is down 90% from pre-pandemic levels. DAL projected daily cash burn to be in the range of $10-15 million in Q1. DAL ended the year with adjusted net debt of $18.3 billion. DAL forecast it would end Q1 with $18-19 billion in liquidity.
• DAL presents at the J.P. Morgan Industrial Conference on Monday March 15 at 8am ET. 
• Shares of DAL  trade at $49.83, up approximately 48% since early November. DAL traded in the mid-$50s pre-pandemic.  DAL’s exp[osure to International and business travel are the primary reasons why it has underperformed some peers.

Closing

The debate around reopening rages. The rally in airlines continues to impress but charts reflect a key inflection point. The airline presentations at the J.P. Morgan Industrials conference provide an update to the current recovery. The quality of the comments and indications of improved linearity loom large. Airlines need to show an acceleration in demand and use it to break above the current cruising altitude.

Questions to ask clients about airlines:

• What is your personal view on flying? Would you fly for personal use? Would you fly for business?
• How will rising fuel costs impact margins?
• Are the debt levels sustainable?
• Is the JETS ETF my best vehicle to play the theme or am I better served to buy an individual name?
• Will domestic carriers continue to outperform business/international carriers?