Global air passenger demand zoomed up nearly 10 percent in January compared to the same month last year, according to the International Air Transport Association (IATA). Demand, as measured by revenue passenger kilometers (RPKs), advanced 9.6 percent, marking the strongest start to a year in more than five years.
Growth was led by the Asia Pacific region, which saw a huge 14.3 percent surge from travel associated with Lunar New Year, the most important time in the Chinese calendar. During the annual two-week celebration, the largest mass migration of humans occurs as families reunite and go on vacations. This past Lunar New Year, an estimated 58 million by air took place. That’s up from 55 million last year and is equivalent to the combined populations of Texas, Ohio and New York. China Southern Airlines, the largest carrier in Asia, added as many as 3,600 flights to accommodate the demand.
According to IATA CEO Alexandre de Juniac, January’s strong demand growth was “supported by the upturn in the global economic cycle and a return to a more normal environment after the terrorism and political ‘shock’ events seen in early 2016.”
North America was slowest out of all the regions, growing at only 3.4 percent, with flight demand between the U.S. and United Kingdom having softened since June’s Brexit referendum.
Headwinds: Trump Travel Ban and Cuba
Near the end of January, the domestic aviation industry was disrupted upon President Donald Trump’s signing of his initial travel ban from seven mostly-Muslim countries. Between January 28 and February 4, bookings issued by those countries fell 80 percent compared to the same period in 2016, according to travel research firm ForwardKeys. But the ban’s effects went well beyond the Middle East, reaching most major world markets. Net international bookings to the U.S. cooled 6.5 percent during the period when the travel ban was in effect, versus the same time last year.
Just six months after travel was normalized between the U.S. and Cuba for the first time in 50 years, some carriers are already beginning to scrap or dramatically reduce service to the island after it’s become apparent that demand from American travelers isn’t nearly as strong as airlines originally anticipated. Among the airlines cancelling routes this year are American Airlines and JetBlue, along with small regional carriers Silver Airways and Frontier Airlines.
Airlines Offer Good Deals for Investors
Some investors right now might be discouraged by high stock valuations. Although it’s true certain sectors and industries are beginning to look expensive, there are still some attractive deals.
Among them is the airlines industry, which had a very reasonable price-to-earnings ratio of 9.0, as of December 31, 2016. This is less expensive than the broader Dow Jones Transportation Index and far more reasonable than the blue-chip S&P 500 Index, which was trading at 21 times earnings at the end of 2016.
This is one of the many reasons why billionaire investor Warren Buffett is bullish on airlines, which he once called a “death trap” for investors. Not only did his holding company Berkshire Hathaway purchase shares of the four big domestic carriers—American, United, Delta and Southwest—but it dramatically expanded those holdings in the fourth quarter, according to regulatory filings. Now there’s even speculation that Buffett and Berkshire Hathaway could be planning to acquire one of these four carriers outright, with Morgan Stanley’s Rajeev Lalwani writing that Southwest’s “domestic focus, robust and sustainable free cash flow, range of growth opportunities, defensible cost structure and more tenured management team” make it a logical candidate.
Southwest, United, Delta and American make up the top four holdings of the U.S. Global Jets ETF (JETS).
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The price/earnings ratio (often shortened to the P/E ratio or the PER) is the ratio of a company’s stock price to the company’s earnings per share. The ratio is used in valuing companies.
Free cash flow (FCF) is a measure of a company’s financial performance, calculated as operating cash flow minus capital expenditures. FCF represents the cash that a company is able to generate after spending the money required to maintain or expand its asset base.
The Dow Jones Transportation Average (DJTA, also called the “Dow Jones Transports”) is a U.S. stock market index from S&P Dow Jones Indices of the transportation sector, and is the most widely recognized gauge of the American transportation sector. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Bloomberg Airlines Index is a capitalization-weighted index of the leading airline stocks in the United States. One cannot invest directly in an index.
U.S. Global Investors is not affiliated with Warren Buffett or Berkshire Hathaway.
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