Air Travel Will Rebound, so Buy the U.S. Global JETS ETF

The U.S. Global Jets ETF (NYSEARCA:JETS) – whose top holdings include Delta (NYSE:DAL), Southwest (NYSE:LUV), American Airlines (NYSE:AAL) and United Airlines (NYSE:UAL) – has tumbled in 2020 as the novel coronavirus pandemic has left airports globally looking like ghost towns.

a close up of a plane: American Airlines plane on ramp in Chicago Airport.

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American Airlines plane on ramp in Chicago Airport.

But the absence of air travel is temporary. In time, it will rebound.

Sure, it will never rebound to pre Covid-19 levels, mostly because business travel will be permanently reduced going forward as more and more companies adopt work-from-home and hybrid work strategies. That’s a big hit for U.S. airlines – and the JETS ETF – because business travelers account for 75% of airline profits.

But, consumer travel will rebound, and even after you factor in a permanent hit to business travel, many of the stocks which comprise the JETS ETF – like DAL stock, AAL stock and UAL stock – are terribly undervalued today.

So my two cents is simple.

Buy the JETS ETF. Weather the turbulence. And hold for the next two to three years, because of that stretch, I think this ETF could almost double.

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Consumer Air Travel Will Rebound

There’s no doubt about it. Consumer air travel will rebound back to and above pre-Covid-19 levels, and it will likely happen sooner than most expect.

The appetite to travel and see the world is large. Last summer, more than 70% of Americans were planning to take a big summer vacation. That’s why this year – amid the pandemic which kept people off planes – consumers didn’t just sit at home and twiddle their thumbs. They traveled in “safe” ways.

The number of road trips Americans went on this summer increased more than 70% year-over-year, while RV sales have been soaring, with July sales up 54% year-over-year.

So, consumers are still traveling. They just aren’t doing so by plane because it has been deemed “unsafe” by the general public.

This won’t last. We will get the virus under control, most likely through mass vaccinations at some point in 2021. As soon as we do, public fear of flying will disappear. And this enormous consumer appetite to travel will flow from cars and road trips today, back to planes and flights by 2022/23.

Less Business Air Travel

There’s also no doubt that business air travel will be permanently reduced going forward.

That’s because a big chunk of companies and employees have permanently shifted to work-from-home or hybrid work strategies. Business surveys put the percent of businesses and employees who have shifted to permanent work-from-home models at anywhere between 20% and 67%.

Big range. I know. But the bigger point is that a lot of businesses are adopting hybrid work models, and in those hybrid work models, business air travel gets reduced, because you just do Zoom (NASDAQ:ZM) or RingCentral (NYSE:RNG) meetings.

This, of course, is an awful thing for airline stocks and the JETS ETF because while business travelers only comprise 31% of air travel volume, they account for 75% of airline profits.

How much will business air travel get knocked?

That’s the million-dollar question. I don’t have a million-dollar answer. But based on the rate of companies shifting to work-from-home models, current air travel trends and the increasing ubiquity of Zoom, I have a feeling that business air travel will be permanently reduced by somewhere around 50% in the early 2020s.

Airline Stocks Are Undervalued

If you do the math here, even a 50% decline in business air travel implies pretty big upside for the JETS ETF over the next few years.

Let’s assume consumer air travel volume, revenue and profits rebound to pre-Covid levels by 2022/23 for most major airlines. Let’s also assume that by 2022/23, business air travel volume, revenue and profits also rebound, but to 50% of their pre-Covid levels.

If you assume the 75/25 business/consumer net profit mix for airlines, then that math implies a 38% drop in airline net profits from pre-Covid levels to 2022/23. Factor in some growth on the consumer side – because of things like global urbanization and rising purchasing power of young consumers (who like to travel more) – and it’s quite likely that for most major airlines, 2022/23 earnings per share come in around 30% below 2019 levels.

United Airlines did $12.05 in 2019 earnings per share. American Airlines did $4.90. Delta did $7.30.

By my math, then, United Airlines will do around $8.40 in 2022/23 earnings per share. American will do ~$3.40 and Delta will do ~$5.10. Based on an airline sector average 8-times forward earnings multiple, that implies 2022/23 price targets of roughly:

$67 for UAL stock, up about 100% from the UAL stock price today.
$27 for AAL stock, up about 130% from the AAL stock price today.
$41 for DAL stock, up about 35% from the DAL stock price today.

The JETS ETF is just a composition of all those stocks. If all of those stocks have huge upside potential over the next few years, then so does the JETS ETF.

Bottom Line on the JETS ETF

Consumer air travel will rebound in big way over the next few years. Business air travel won’t.

Under that simple and very reasonable assumption, the math says airline stocks have big upside potential between now and 2022/23.

So, if you time is on your side and your can stomach near-term turbulence, buy the JETS ETF.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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Gallery: 5 Airline Stocks Set to Survive the Pandemic (InvestorPlace)

Airline stocks were among the hardest hit by the novel coronavirus. In a matter of days a vibrant, bustling industry virtually ground to a halt. As the airlines shut down, investors sold off in equally rapid fashion. Rumors swirled about whether some airlines could even weather the crisis. However, there has been some good news in the last month. Traffic through major U.S. airports is on an upswing. But is this because people want to fly? Or is it just a calculated risk to remedy extreme cabin fever? The latter seems more likely. Business travel remains at a standstill. And even if consumers wanted to travel, many routes remain closed. Still, some investors are getting back into airline stocks. That might be a good play. It seems unlikely that there will be another lockdown. However, the virus will be around for awhile even if there is a vaccine. And speaking of the vaccine, don’t trade airline stocks on that news. You’re sure to be disappointed. A vaccine will be ready when it’s ready. And the first one through the door may not be the only one, or even the most effective one. That means you have to look at cold, hard balance-sheet fundamentals. Right now, I’m looking at the airlines that have the discipline and the liquidity to hang on and live to fight another day. It may not be pretty, but these stocks look like they will survive the pandemic in the best position to grow. Southwest Airlines (NYSE:LUV) Delta Air Lines (NYSE:DAL) Alaska Air Group (NYSE:ALK) Allegiant Travel (NASDAQ:ALGT) JetBlue Airways (NASDAQ:JBLU)

Airline Stocks: Southwest Airlines (LUV)

At the outset of the pandemic, Southwest appeared to be one of the best contrarian bets among airline stocks. The company has inarguably the strongest balance sheet of its peers. One of the crucial metrics that investors are looking at right now is cash burn. At the onset of the pandemic, Southwest was burning around $30 million in cash per day. However, by June, the cash burn was down to just $16 million a day. And for the quarter Southwest averaged $23 million. The company did that while actually adding cash to its balance sheet. That in itself may be reason enough to speculate on LUV stock. And here’s another one. Despite being among the airlines that were pleading for additional stimulus, Southwest actually turned down a loan from the federal government. This doesn’t mean happy days are here again, but it does reinforce the fact that Southwest has a strong balance sheet. There is no such thing as a solid bet among airline stocks. However, if you’re talking about survival, than LUV stock has to be at the top of the list.

Delta Air Lines (DAL)

Considered one of the “big four” carriers, Delta also has a strong balance sheet, but not as strong as Southwest. The company posted lousy earnings in July, but it still had $15.7 billion of cash on its balance sheet. I think Delta is doing many of the right things. The company was one of the first to leave the middle seat open and is saying that, with demand likely to remain suppressed, it may give customers the option to pay to have the seat left open. The airline is engaging its customers to craft a safe in-flight experience that will be part of the new normal until there’s a safe, effective and widely available vaccine. And although he’s avoiding the entire sector, Mark Tepper, the president of Strategic Wealth Partners, says Delta may be the best stock coming out of the pandemic. Tepper bases his prediction on the strength of the airline’s management and maintenance teams as well as its partnership with American Express (NYSE:AXP). DAL stock is up 70% from the low it hit in mid-May. However, it remains over 50% below the 2020 high it reached in January.

Airline Stocks: Alaska Air Group (ALK)

Alaska Air has one of the lowest cash burns in the industry. In its July earnings report, the airline reported that it was averaging a burn of just $4 million a day in June. The company is pledging to get that down to $0 by the end of the year, but it will need some help to get that done. And that’s reflected in the stock price. ALK stock is down nearly 45% for the year. Like Delta, Alaska Air is taking steps to increase consumer confidence. The airline has partnered with essential oils brand EO to introduce what the airline is calling “air-omatherapy” as part of its Next-Level Care initiative. In the company’s press release, it stated that, “Starting Aug. 21, guests on all Alaska flights will be offered a complimentary, single-use EO hand sanitizing wipe, which is 99.9% effective against common germs, scented with pure organic French lavender, chamomile flower and white tea essential oils, and 100% biodegradable.” This is the latest initiative laid out by the airline in addition to an expanded mobile app to allow for more touch-free travel. And like many airlines, Alaska pledges to keep the middle seat open through the end of October.

Allegiant Travel (ALGT)

Allegiant is an example of how where you finish may depend on where you start. The company had one of the best operating margins in the industry heading into the pandemic. That was because of the company’s business model that focuses on flexing capacity as needed to meet seasonal demand levels. During the second quarter, this model allowed Allegiant to have a 50% reduction in capacity, easily the broadest of any domestic carrier. In the last quarter, Allegiant delivered a mixed bag in its earnings report. Earnings were lower than expectations, but the airline had a beat on revenue. The company posted a daily cash burn of $900,000 in the second quarter, and management was projecting that burn to increase slightly to just over $1 million a day in the third quarter. The stock is down 30% for the year, but ALGT stock has gained nearly 85% since hitting its low in May. And ALGT stock has gained 9% in the last month.

Airline Stocks: JetBlue Airways (JBLU)

I’ve been both complimentary and critical of the candor from JetBlue CEO Robin Hayes. At the outset of the pandemic, I complimented Hayes for his frank memo to JetBlue employees. It couldn’t have been an easy message to send, but candid messages frequently are not. At the same time, I was critical of Hayes for a recent interview with Bloomberg in which he said, “The day of reckoning is coming for the industry, because we can’t continue with where we are in terms of numbers of jobs we have and see demand at 25% to 30% of where we’d normally be.” While that’s a true statement, it’s hard to engender confidence in travelers when you’re asking for additional stimulus, needed or not. However, that criticism aside, JetBlue has the liquidity to see the finish line. And because the carrier is heavily dependent on domestic routes, it will be in a good position to capitalize on the budget-conscious traveler who just wants a quick trip to anywhere USA. JBLU stock is up 64% from its March low. However, it’s still down nearly 48% from its year-to-date high in February. Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for Investor Place since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.

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