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Fly, don’t invest with airlines this fall

There's good news for air travellers beginning later this month. According to Rick Seaney, chief executive of travel website FareCompare, U.S. airfares are expected to drop 10 per cent to 20 per cent this fall. Canadian airlines have yet to announce price rollbacks, but likely will follow.

Demand for air travel normally records a seasonal decline in fall after a peak in summer holiday traffic. Rick Seaney also noted: "Demand appears to be slightly down this summer from what had been expected and the airlines are not pushing their luck with further price increase attempts – at least for now".

The start of the seasonal slowdown in air travel prompted two analysts to downgrade equities in the sector last week. Jamie Baker from JP Morgan noted:  "The combination of geopolitical concerns and cautious economic optimism has lifted oil prices just at sluggish economic trends are catching up to the airlines". Accordingly, he reduced price targets for most U.S. carriers.

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Helane Becker at Dahlman Rose said: "We believe the shares priced in a bottom for jet fuel costs. We believe load factors peaked and passenger revenue per available seat mile comparisons become more difficult as the year goes on. We advise investors to consider taking profits on strength".

Higher costs are hitting profits in the sector. A 17 per cent increase in jet fuel prices since the beginning of June will impact third-quarter earnings. In addition, the $3 per passenger emission surcharge for flights to Europe effective Jan. 1, 2012 (which already has been passed to passengers) will not help the industry on a year-over-year basis.

Airline equities have a history of moving lower in the month of August. Thackray's 2012 Investor's Guide notes that the weakest sub-sector in the month of August is the airline industry. The airlines have recorded an average loss of 5.2 per cent per period during the past 20 periods. History is about to repeat.

On the charts, the Guggenheim Airline Index has a deteriorating technical profile. The intermediate trend is neutral. The index and its related exchange traded fund are forming a possible double top pattern, and support is at $27.94. A break below support completes the pattern and implies intermediate downside risk to $23.35 where long-term support exists. Units already trade below their 20-, 50– and 200-day moving averages. Strength relative to the S&P 500 index turned negative early in July.

The preferred investment strategy is to avoid North American airline stocks and their related ETF during the seasonally weak fall season this year. As a passenger, enjoy flying at a lower cost.

One exchange traded fund in the industry is available, the Guggenheim Airlines ETF. The ETF owns 25 holdings. Top five holdings by weight are United Continental Holdings, Delta Air Lines, Southwest Airlines, All Nippon Airlines and Singapore Airlines. Management Expense ratio is 0.65 per cent.

Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst at Horizons Investment Management, offering research on Horizons Seasonal Rotation ETF (HAC-T). All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment. Horizons Investment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://www.timingthemarket.ca/

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About the Author

Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst for JovInvestment Inc. Reports are available at www.timingthemarket.ca and www.equityclock.com. Follow him on Twitter @EquityClock. More

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