We recently shared that summer is expected to mark a new historic high in commercial air passenger volume, breaking the previous record set in 2019. One of the unforeseen side effects of the current travel boom has been flight delays, mostly because of staff shortages, and this has raised the issue of pilot retirements.
Not too many people are aware that pilots in the U.S. must retire at age 65, due to federal regulations. That may be set to change, however, if a just-passed bill succeeds in becoming law.
Last Thursday, in a bipartisan vote, the House of Representatives approved the Federal Aviation Administration (FAA) reauthorization bill, which, among other things, authorizes more than $100 billion for airline operations, equipment and airports over five years. It also (controversially) raises the pilot retirement age from 65 to 67.
The new legislation will now need to be negotiated between the House and the Senate to move forward. If it doesn’t pass by the end of the fiscal year on September 30, when the current FAA law expires, crucial aviation programs could be at risk of being shut down.
When it comes to the pilot shortage, one could argue that a reasonable supply deficit could actually encourage airlines to demonstrate capacity growth discipline and focus on the most profitable routes. We support this idea, but others see a potential crisis brewing.
A “Tsunami” of Pilot Retirements?
Testifying before the House Transportation and Infrastructure Committee in April, Regional Airline Association (RAA) President and CEO Faye Malarkey Black warned of a “coming tsunami of pilot retirements.” The shortage has resulted in more than 500 regional aircraft being grounded, Black said, and a 25% reduction in flights at 308 airports, mostly smaller ones.
Further, the shortage of pilots, particularly captains, is forecast to be exacerbated as approximately 50% of the workforce will retire in the next 15 years.
These headwinds come despite increased enrollments in pilot training schools and rising numbers of pilots since 2017, according to a May report by the Government Accountability Office (GAO). In the same report, though, the GAO discloses that aviation businesses have reported difficulties in maintaining sufficient numbers of mechanics.
How are the airlines weathering these crosswinds? In response to workforce supply concerns, airlines are increasing pay for pilots and mechanics. Some regional airlines made significant pay hikes in 2022. Airlines are creating flight schools, and the FAA is supporting industry workforce development initiatives, including grants to attract young people to aviation careers.
To be fair, not everyone agrees that there’s a pilot shortage. The Air Line Pilots Association (ALPA) suggests that the idea of a pilot shortage isn’t factual and is an attempt to detract from airlines’ mismanagement, particularly in the wake of the pandemic.
The spread between views on the pilot shortage could suggest two different investment implications. If the shortage is real and worsening, it could represent a challenge that airlines must address to ensure operational stability. However, if it’s a narrative spun to distract from mismanagement, as the ALPA suggests, it could raise concerns about the governance and risk management of certain airlines, affecting their investment attractiveness.
American and United Airlines Surpass Expectations Amid the Travel Boom
Amid these swirling winds, we’ve seen some major updrafts. Last week, American Airlines increased its earnings forecast for 2023 in response to the travel boom. The Fort Worth-based airline now predicts earnings of $3.00 to $3.75 per share for the year, potentially higher than Wall Street expectations of $3.10.
In the June quarter, American outperformed consensus, reporting adjusted earnings per share of $1.92 and total revenue of $14.06 billion, against the anticipated $1.59 per share and expected $13.74 billion. Furthermore, the airline reported net income of $1.34 billion, up from $476 million in the same period a year earlier.
United Airlines also reported record quarterly earnings, surpassing estimates due to a surge in international travel demand. Despite disruptions, the airline managed a strong financial performance, with shares rising more than 8% last week. In the third quarter, United projects capacity growth of around 16% and an estimated revenue increase of up to 13% compared to the same period in 2022.
Both American Airlines and United Airlines show us that there are potential opportunities to be had even amid the challenges. They’re also leveraging the ongoing international travel boom, as evidenced by United’s plans to offer direct flights from the U.S. to Manila in the Philippines, starting in October. This expansion into Asia is part of a broader strategy that seeks to leverage the upsurge in international travel bookings after the pandemic slump.
A Clear-Sky Forecast for Airline Investors
Indeed, recent economic news has been more positive than anticipated, as indicated by the Citi Economic Surprise Index reaching its highest point in the last two years. The index provides a snapshot of how the economy is performing against expectations, with higher numbers signifying better-than-expected results. This uplift has been attributed to favorable recent reports, including decreasing U.S. consumer price inflation, reduced wholesale price increases, lower import prices and fewer-than-expected jobless claims.
A year ago, the same index warned of a potential economic slowdown as the Federal Reserve increased interest rates significantly, while inflation remained persistently high. This led many economists to predict an upcoming recession.
However, many economists are now retracting those predictions as economic data continues to defy expectations.
For airline investors, we believe this is a landscape of opportunity. Amid the turbulence, there are pockets of clear air. There are legislative tailwinds, innovation in training and recruitment, international expansion strategies and an overall robust economy that, we believe, favors travel.
To see the full list of holdings in the U.S. Global Jets ETF (JETS), click here.
To download a copy of the JETS prospectus, fact sheet and investment case, click here.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
Please carefully consider a fund’s investment objectives, risks, charges, and expenses. For this and other important information, obtain a statutory and summary prospectus for JETS by clicking here. Read it carefully before investing.
Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the funds. Brokerage commissions will reduce returns. Because the funds concentrate their investments in specific industries, the funds may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries. The funds are non-diversified, meaning they may concentrate more of their assets in a smaller number of issuers than diversified funds. The funds invest in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks are greater for investments in emerging markets. The funds may invest in the securities of smaller-capitalization companies, which may be more volatile than funds that invest in larger, more established companies. The performance of the funds may diverge from that of the index. Because the funds may employ a representative sampling strategy and may also invest in securities that are not included in the index, the funds may experience tracking error to a greater extent than funds that seek to replicate an index. The funds are not actively managed and may be affected by a general decline in market segments related to the index. Airline Companies may be adversely affected by a downturn in economic conditions that can result in decreased demand for air travel and may also be significantly affected by changes in fuel prices, labor relations and insurance costs.
Fund holdings and allocations are subject to change at any time. Click to view fund holdings for JETS.
Distributed by Quasar Distributors, LLC. U.S. Global Investors is the investment adviser to JETS.
The Skift Travel Health Index is a real-time measure of the performance of the travel industry in 22 countries. The Index tracks 84 indicators to assess the health of the travel industry in each country. Citigroup Economic Surprise Index represents the sum of the difference between official economic results and forecasts. With a sum over 0, its economic performance generally beats market expectations. With a sum below 0, its economic conditions are generally worse than expected.
Metrics such as earnings and revenue of the underlying companies in the fund’s portfolio do not represent or predict the performance of the fund.