Macro

Wall Street Bets Against Airlines as JETS Short Interest Hits 27% Amid Travel Boom

Record 271M passengers this summer, but JETS ETF short interest hits 27% and airline stocks down 12%.

By Barry Stearns

7/11, 10:04 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
American Airlines Group, Inc.
Delta Air Lines, Inc.
U.S. Global Jets ETF
Southwest Airlines Company
Spirit Airlines, Inc.
Frontier Group Holdings, Inc.
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Key Takeaway

  • Despite record summer travel, short interest in the US Global Jets ETF (JETS) is over 27%, reflecting skepticism about airline profitability.
  • Airline stocks underperform with JETS down 12% and the S&P Supercomposite Airlines Index down 19%, compared to a 28% rise in the S&P 500.
  • Rising costs, competition, and overcapacity are squeezing margins; Delta's profit warning led to a 9% drop in its shares.

Record Air Travel, But Airline Stocks Struggle

Despite a record number of Americans flying this summer, traders are skeptical about the profitability of airlines. Short interest in the $1.1 billion US Global Jets ETF (JETS) has surged to over 27% of the ETF’s free float, the highest since 2019, according to S3 Partners LLC. This bearish sentiment is reflected in the performance of airline stocks, with JETS down 12% over the past year and the S&P Supercomposite Airlines Index plunging 19%, compared to a 28% surge in the S&P 500 Index.

US carriers are projected to transport a record 271 million passengers from June 1 to August 31, a 6.3% increase from the same period last year, according to Airlines for America. Globally, airline profits are expected to rise to $30.5 billion in 2024, up from the $25.7 billion estimated in December by the International Air Transport Association. However, the industry faces significant challenges, particularly in maintaining profit margins.

Margin Pressures and Operational Challenges

Airlines are grappling with several issues that are squeezing their margins. Shortages of pilots and cabin crew have forced carriers to increase wages to attract talent. Air traffic control constraints have led to costly disruptions. Additionally, airlines' ambitious growth plans have resulted in an oversupply of available seats, leading to cut-rate promotions to fill planes. "Just because TSA says there’s a heck of a lot of people going through security, that doesn’t mean that we’ve got an industry that’s killing it," said George Ferguson, a Bloomberg Intelligence analyst. "If I were an investor, I would want record profits, too — and from a margin perspective, we don’t have that."

Delta Airlines Inc. recently warned that its third-quarter profit would fall short of expectations due to heavy competition in the domestic market driving airfares down. Shares of Delta fell as much as 9% following the announcement. Delta's stock has climbed more than 16% this year, making it the second-best performer in the S&P airline index after SkyWest Inc.

Investor Sentiment and Market Reactions

The weak outlook from Delta adds to the uncertainty in the airline sector, which has already seen several companies revise their guidance. Southwest Airlines Co. recently dialed back its revenue outlook for the second quarter, and American Airlines Group Inc. cut its profit forecast in May. Low-cost carriers are feeling the most pain, with shares of Frontier Group Holdings Inc. down 24% this year and Spirit Airlines Inc. down 81%, trading at an all-time low. Analysts from Raymond James and Deutsche Bank have downgraded Spirit to sell-equivalent ratings.

Investors are pulling out of JETS, with $589 million withdrawn this year, dragging its assets to the lowest level in four years, according to Bloomberg data. Many airlines are now taking steps to curb supply by dropping underperforming routes and delaying the delivery of new planes. Boeing Co. and Airbus SE are both facing production and supply-chain issues, contributing to a shortfall in new jets. US airlines are expected to end the year with smaller fleets, suggesting a more balanced supply in the coming quarters.