Further Spirit cheer makes one wonder about the ETF again

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By admin July 30, 2014 11:44

Further Spirit cheer makes one wonder about the ETF again

The average domestic airfare for the USA decreased to $381 in the first quarter of 2014, down 1.0% from $384 in the first quarter of 2013, adjusted for inflation, the US Department of Transportation’s Bureau of Transportation Statistics (BTS) reported today. During the January to March 2014 period, Cincinnati, Ohio, had the highest average fare, $514, while Sanford, Florida, had the lowest at $119.

These figures should be put into context by matching them up against average fares at the turn of the century. If we so, then we get the stark reality that US domestic airfares are down by a huge 19.9%, which took place while there was an increase in overall consumer prices of over 40% during the same 14 year period. But during the same period, ancillary revenue has increased to an average of 30% of total revenues from just over 10%.

The reason for all this is very clear to all – The rise of the low cost and ultra-low cost airlines that are re-shaping the US airline sector and lowering the average fares paid. Yesterday Spirit Airlines came out with yet more wonderful results (see Americas section below) sending its shares higher.

As Spirit, Frontier, Allegiant and others increase services drastically in 2014 (see Airline Economics Issue 20 www.airlineeconomics.co), we are also seeing United and American buying back shares en-mass, dividends are back and business is brisk and it makes one wonder about where the Guggenheim ETF would have been standing now if it had not been quietly closed.

Indeed I ran the risk of becoming a one-man Guggenheim ETF roadshow during 2011 with my own spreadsheets and information popping up at conferences and in publications, but I recall last year when one contact looked to see about cashing-in with Guggenheim and was told the ETF was closed and his funds were already deposited. A great shame as it would have topped the 200% growth mark by now, but it was a victim of lack of interest just like the Direxion ETF before it.

It makes you wonder how long it will be before many institutions treat airline investment with enthusiasm. But given that the NYSE Arca Global Airline Index is up 61% since March 2013 is it not time that someone tried again at launching an airline ETF?

It is true to say that where US airlines are concerned, save for United right now although it is improving, the entire system is very strong and the airlines are so very adept at fleet management that they can, dare I say it, cope with shocks in a far superior manner than was seen in 2001 or even 2008. The US airline industry is strong and has depth. It is ready for another ETF to be launched off of the back of it. But a word of caution: As airfares continue to fall in the USA domestic market via the growth of the ULCCs, could we argue that the majors need to have a strategy re-think so as not to depend on international traffic too much in the future? Look to Frontier and Spirit growth against the United and Delta systems to view the impact from this summer.

admin
By admin July 30, 2014 11:44