What is an 'Airline Industry ETF'

An airline industry ETF is a sector exchange-traded fund (ETF) that invests in stocks of airline companies, so as to obtain investment results that correspond to those of an underlying airline index. Because of the very limited number of airlines in most nations, an airline ETF is unlikely to be restricted only to domestic carriers but would very likely include foreign carriers as well.

BREAKING DOWN 'Airline Industry ETF'

Airline industry ETFs are a way to invest broadly within the airline industry, but they aren’t all created equal. Investors who are considering investing in airline companies, or any sector, should become familiar with the metrics that can help them determine the profitability and efficiency of companies within that sector. For airline companies, two key metrics are available seat miles (ASM) and revenue per available seat mile (RASM).

ASM is a measurement of a flight's ability to produce revenue; the measurement is based upon the numbers of seat miles that can be sold on a particular aircraft. ASM is a crucial metric for investors as it allows them to identify airlines that produce the most revenue per seat. When some seats remain empty on a flight, the airline's ASM is below capacity. Over time, a pattern of empty seats on a particular airline proves very costly to the company.

RASM is a metric analysts and investors use to assess the efficiency of an airline. The RASM is calculated by dividing the operating income by the ASM. Larger RASM tends to indicate higher profitability for the airline. Notably, the revenue is not only limited to ticket sales; it includes other influences such as profitability and efficiency. 

Pros and Cons of an Airline Industry ETF

The airline industry is susceptible to a number of factors that can affect demand for air travel; these include economic downturn, terrorism and inclement weather. An airline ETF may underperform at such times, as well when fuel prices are surging, since the cost of aviation fuel has a major impact on airline profitability.

There are compelling reasons why an airline industry ETF could make sense for investors looking to capitalize on growth trends in transportation. The International Air Transport Association (IATA) expects around 7.8 billion passengers to travel by air in 2036, nearly twice the amount of people who traveled by air in 2017. 

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