How To Invest In Aviation. Airlines are essential to the economy. The most obvious way to invest in aviation is to buy an individual airline stock. Although purchasing airline stock is simple, you just have to place a buy order with your investment broker.
Locating a solid company to invest in can be a bit difficult. However, there are numerous ways to invest in aviation, but each one involves some level of risk.
Airline stock prices follow economic cycles, and previous downturns like the pandemic resulted in airline business failures. But can airline stock still be invested in? Read through as this article provides valuable answers..
Specific Terms in the Airline Sector
There are several terms in the airline sector that investors should be aware of before making an investment in airline stock. They include;
RASM, which stands for revenue per available seat-mile, is a measure of airline profitability. Seat-miles are calculated by multiplying the number of seats made available by an airline by the number of miles traveled by the airline’s jets. The RASM of an airline is calculated by dividing revenue by seat miles.
RASM is essential because all flights have different fare and cost structures based on a variety of factors such as flight distance and aircraft type. A view of total revenue or expenses will provide you with an incomplete picture.
The RASM of an airline indicates whether it is selling tickets at any price to fill seats or whether it has enough pricing power to sell seats for profit. Two airlines may both have full planes, but as an investor, you want to focus on the one with the highest margins.
CASM, which stands for costs per available seat mile, is calculated by dividing an airline’s total costs by the number of available seats and multiplying the result by the number of miles traveled. It tracks expenses in the same way that RASM tracks sales.
3. Load Factor
The load factor determines how well an airline fills its seats. For a single flight, it is as simple as stating that 50 of 80 seats were filled. However, because of differences in flight times, that simple definition does not tell the entire story for a major airline.
Airlines calculate their system-wide load factor by calculating the number of seats filled for each mile traveled. Major airlines will provide this information in earnings reports and conference calls, but investors can calculate it at home by dividing revenue passenger miles (the number of passengers on a flight multiplied by the number of miles traveled) by available seat miles.
How To Invest In Aviation
1. Airline Stock
Investing in aviation can be done by purchasing stocks of individual airlines, which is a straightforward process. However, finding a stable company to invest in can be difficult as many airlines have filed for bankruptcy. Only JetBlue and Southwest airlines had not filed for Chapter 11 protection in the US by November 2011. As of April 2012, around 25% of regional air carriers were in bankruptcy. Investing in airline stocks can be profitable, but it is important to do research and be prepared for potential volatility.
2. Aviation Support Stock
Apart from airlines, there are many other companies in the aviation industry that you can invest in, including airport operators, airport concessionaires, airplane manufacturers, aircraft maintenance companies, and aviation supply companies. Some companies, such as Boeing and Honeywell, have subsidiary companies in the aviation industry, so investors may need to do more research to identify potential investment opportunities.
3. Aviation Mutual Funds
Aviation-oriented mutual funds can provide instant portfolio diversification and professional management of investments. Different funds may have different investment objectives and may invest in different parts of the aviation industry. Investors should carefully review the fund’s prospectus to ensure that the fund’s goals align with their own before investing. For example, Fidelity’s Select Air Transportation Portfolio focuses on investing in the stock of air transportation companies that move passengers, mail, and freight, while the Rydex Series Trust Transportation Fund invests in various domestic transportation-related industries including aviation.
4. Aviation Exchange-Traded Funds
Exchange-traded funds (ETFs) aim to match the performance of specific market indexes, whereas mutual funds attempt to outperform market averages. ETFs create a portfolio that mirrors the composition of corresponding stock indexes to emulate the results of specific market sectors. In the aviation industry, there are a variety of indexes to choose from, such as the SPADE Defense Index and the NYSE Arca Global Airline Index. Investing in aviation ETFs can provide broad exposure to the industry sector with lower management and operating expenses.
Factors to Consider When Investing in Airline Companies
The success of airline companies just like any other business depends on how well it is managed. There is a significant risk attached to not managing an airline well. Nevertheless, there are key factors an investor must note before investing in aviation. Thy include;
1. Yield and Load Factors
Before the company begins to lose money, the airlines’ “yields” begin to decline. In other words, “yields” are similar to airline profit margins. They are determined by how much revenue an airline earns for flying a passenger for a mile.
When an airline flies more passengers, its revenue increases. Load Factor is a measure of how many passengers an airline transports. When an airline has a load factor of 70%, it means that on average, 70% of the seats on a flight are occupied by paying passengers.
2. Profit or Loss
The majority of airlines in the world suffer a loss. A private airline that is losing money will soon be forced to shut down. Take, for example, Kingfisher Airlines in India. For over two years, the company lost so much money that it couldn’t pay its employees, suppliers, or even its tax obligations.
The operational performance of airlines can be measured using EBIDTAR, which stands for Earnings Before Interest, Tax, Depreciation, Amortisation, and Rentals/Restructuring costs. Because airlines do not own all of their aircraft but instead lease them, EBIDTAR provides a more accurate picture of their profitability than EBIDTA with no rental fees.
3. Debt Levels
Slow economic growth has put a great deal of pressure on airlines. Airlines have had to borrow more money from banks in order to continue operations. Banks, on the other hand, have demanded that owners put their own money into the airline as equity in order to pay off debt.
When an airline’s assets outweigh its liabilities, it files for bankruptcy protection around the world. In the United States, for example, AMR, the holding company for American Airlines, declared bankruptcy when its debt levels rose. Lenders must then develop a formula that allows an airline to operate while also managing debt repayment.
Airfares determine an airline’s yields. Even if costs are high, higher airfares can assist the airline in recovering its costs. Airlines are frequently careful not to raise fares to the point where the regulator is forced to intervene to protect consumers’ interests. A regulatory intervention limits airlines’ ability to increase profits.
5. Fleet Size and Market Share
When customers prefer to fly with one airline over another, the airline gains passengers and revenue. As a result, airlines are frequently seen competing for “market share,” which represents how many people chose an airline from a given set of customers.
If an airline has more aircraft, it will be able to attract more customers and increase its market share. However, this is not the case in the airline industry. The total number and type of airplanes in an airline’s fleet is essential. For example, a large but inefficient aircraft can severely harm an airline’s profitability.
Managing the size of an airline’s fleet is critical to controlling costs. So just because an airline has a larger market share or more planes does not mean it is financially strong enough to survive.
Is it Best to Invest in Aviation?
The airline industry is still cyclical, but the pandemic demonstrated that the companies are now strong enough to withstand difficult operating conditions without going bankrupt.
Air cargo is emerging as a reliable investment, with rising demand and attractive potential returns for investors.