Is It Time To Check Some Bags With The Airline ETF?

The U.S. Global Jets ETF (NYSE:JETS) has risen just two-thirds of a percent since coming to market on April 30, a disappointing performance when considering the United States Oil Fund LP (ETF)(NYSE:USO) is lower by 25.3 percent over the same period.

Tumbling oil prices often spark airline shares higher because fuel is the largest input cost for airlines. Honing in on a more recent time frame, JETS, which is home to roughly 30 stocks, is benefiting from lower oil prices. As USO has shed 13.5 percent over the past month, JETS has surged 9.4 percent.

This is a sign that markets are pricing in the positive impact of lower oil prices on airlines' bottom lines, but there are other reasons to think the recent ascent for JETS could be in its nascent stages.

More Signs

In the first seven months of 2015, the S&P 1500 Airline index declined 11%, as we think investors focus on capacity additions with a worrying eye. However, S&P Capital IQ thinks that airline execs have learned from past costly mistakes on adding too much capacity and forecasts 2015 as a record profitability year, driven by revenue growth and the benefits of lower oil prices, said S&P Capital IQ in a research note out Tuesday.

S&P Capital IQ is not alone in its bullish assessment of airline stocks. Earlier Tuesday, Morgan Stanley analyst Rajeev Lalwani commented on the U.S. airline sector, noting that the recent drop in fuel prices is offsetting what would have been "large" downward revisions to his earnings estimates.

Consolidation?

While low oil prices are a boon for airlines, the industry has pricing power thanks to several rounds of consolidation, notes S&P Capital IQ. In recent years, airline marriages have created industry giants such as American Airlines Inc(NASDAQ:AAL), a combination of the American and US Air, and United Continental Holdings Inc(NYSE:UAL). Those are the third- and fourth-largest holdings in JETS, combining for 23.5 percent of the ETF's weight.

Fare increases, fewer fare sales and an increased mix of business travelers (who tend to pay more for tickets) contributed to industry revenue growth. Average fares have risen sharply over the past five years and passenger load factors (a measure of how full, on average, flights are) are at record levels for the industry. In 2014, the load factor was 83.4%, up from 83.1% and 82.8% in 2013 and 2014, respectively, said S&P Capital IQ.

JETS, which is off to a fast start having amassed $48.1 million in assets under management in just over three months of trading, is also benefiting from those pesky fees airlines charge. No one enjoys paying to check a bag or for what usually is a forgettable in-flight meal, but airlines love charging those fees because that cash ends up to be earnings gravy.

S&P Capital IQ notes, Bag fees and reservation change fees alone accounted for $4.6 billion in revenues in 2014, up from $3.5 billion in 2012, according to statistics from the Bureau of Transportation Statistics.

While $4.6 billion might not sound like a massive sum, consider this: It is nearly two-thirds of JetBlue Airways Corporation(NASDAQ:JBLU)'s market cap. That stock is the seventh-largest holding in JETS. S&P Capital IQ has an Overweight rating on the ETF.