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American Airline Dips to More Than 2-Year Low: ETF in Focus

Zacks Equity Research
Shares of the biggest airline company of the world have plunged more 35% this year owing to surging fuel costs, putting ETF in focus.

Shares of American Airline AAL, the world’s largest airline fell by nearly 6% to a more than two-year low on Oct 9 as the carrier reported in an investor update that its fuel costs were higher than expected in the second quarter and as many as 2100 flights got canceled due to last month’s Hurricane Florence (see: all the Industrial ETFs here).

The canceled flights cost it $55 million in revenues and $50 million in pretax income. Apart from the hurricane, the carrier paid $2.28 to $2.33 a gallon for fuel in the quarter -- six cents more than estimated in July. Brent prices jumped to the highest level in nearly four years on potential U.S. sanctions against Iran expected from November. Simultaneously, gas prices also soared to their highest level in four years.

Shares of the company are down more than 35% this year. The drop is the biggest, per Standard & Poor’s index of nine domestic airlines. This is building pressure on CEO Doug Parker to keep investor trust amid rising oil prices (read: Sector ETFs to Benefit or Lose as Crude Hits 4-Year High).

"Increased revenue in the third quarter wasn't enough to offset higher fuel costs, suggesting that margin expansion is unlikely to occur until 2019," Helane Becker, a Cowen & Co. analyst, said in a report.

The company will be reporting third-quarter earnings later this month. Per Thompson Reuter Poll, the company is expected to post earnings per share of $1.21, down from nearly 15% year over year. However, American Airlines raised its estimate for revenue per seat mile, a proxy for pricing power up by 2-3% from the previously forecast 1-3%. The adjusted pretax margin was maintained at the 7% level.

Fuel and employee expenses are the two major costs for any airline company. The airline decided to not buy hedging contracts providing cover to its fuel cost when it merged with U.S. Airways in 2013. This decision has seriously affected them with the price of jet kerosene rocketing up by 39% over the past year.

The year has been dismal for the Domestic airline  stocks barring United Continental Holdings UAL whose shares are up by nearly 21% this year (read: 7 Leveraged/Inverse ETFs Off to a Strong Start in October).

The following is the only airline ETF:

U.S. Global Jets ETF JETS

The fund tracks the U.S. Global Jets Index. It provides investors access to the global airline industry, including airline operators and manufacturers from all over the world. It comprises 34 holdings with Southwest Airline Co. LUV (12.34%), United Continental Holdings Inc (11.98%), Delta Air Lines Inc DAL (11.42%) and American Airlines Group Inc (10.51%) being the double-digit weight holders in the fund. It has amassed $95.4 million and charges an expense ratio of 0.60%. The fund has lost 7.9% year to date and 2.1% over the past year. It has a Zacks ETF Rank #4 (Sell) with a High risk outlook.

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