Why Top-Ranked Airlines ETF Is Strong At The Start Of Q2

Airlines stocks and ETFs have been soaring since the start of the second quarter with the pureplay U.S. Global Jets ETF (KL:JETS) (up 5.3%) beating the S&P 500 (up 2.1%). The main reason for this rally is Delta Air Lines’ DAL raised earnings guidance for the first quarter, released on Apr 2.

Delta will kick off the earnings season for the airlines space on Apr 10. The news acted as a cornerstone for the entire industry, sending the stocks higher. Airlines stocks come from a top-ranked Zacks industry (top 41%).

Inside the Raised Guidance

For first-quarter 2019, Delta expects adjusted earnings per share in the 85-95 cents band, higher 70-90 cents projected earlier. The mid-point (90 cents) of the guided range was above the Zacks Consensus Estimate of 81 cents. Also, pre-tax margin is expected between 7% and 8% (past outlook: 6.5-8.5%).

Moreover, it expects the top line to rise approximately 7%. Total unit revenues (TRASM) are anticipated to rise approximately 2% (prior view was an increase in the 0-2% range). The upside can be primarily attributed to healthy corporate travel demand. Also, the contract extension between Delta and American Express (NYSE:AXP) aided first-quarter TRASM to the tune of 1 point.

The company’s non-fuel unit costs have also improved backed by better completion factor and cost-control measures. The metric is now envisioned to be either flat or to increase up to 0.5% (previous view was an increase of 1-2%).

Average fuel price is estimated between $2.03 and $2.08 per gallon. Additionally, effective tax rate is projected in the range of 23-24% for the March quarter. Capacity is estimated to rise approximately 5% year over year in the soon-to-be-reported quarter.

Spring Travel Demand

The industry enjoys a seasonal tailwind this time around, thanks to Spring travel demand.Airlines for America (A4A) shows that air travel is expected to reach an all-time high between Mar 1 and Apr 30. About 158.2 million passengers (2.59 million per day) will take to the skies over this two-month period, up 4.3% from last year. Low fares, ample air services and a buoyant economy marked by a solid labor market made this possible, per A4A.

In order to cater to the higher demand from 106,000 additional daily passengers, U.S. airlines will likely increase the number of seats by 129,000 per day across their networks (see: Air ETFs, Stocks Set to Gain on Upbeat Spring Travel Trend).

JETS in Focus

The $78.9-million fund holds more than 30 stocks in its portfolio and is focused on a few individual securities. Delta Airlines (NYSE:DAL) (13.5%), American Airlines (12.1%), United Continental (11.7%) and Southwest Airlines (NYSE:LUV) (11.68%) take the first four positions in the fund.

Alaska Air and JetBlue hold the seventh and ninth position in the fund with a 3.93% and 3.90% weight, respectively. The product charges 60 bps in fees. The fund has a Zacks Rank #2 (Buy) (see all industrials ETFs).

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