Some stocks will gain from surging travel even as airlines struggle

This year offers the latest proof for an old joke about investing in airlines. When Richard Branson, the British business magnate who co-founded the Virgin Group, was once asked how to become a millionaire, he quipped: “There’s really nothing to it. Start as a billionaire and then buy an airline.” To prove the point, many airline stocks have tumbled since the start of the year, contending with discounted seats, safety issues that have grounded planes and last month’s global tech outage that canceled thousands of flights. The U.S. Global Jets ETF , whose largest holdings are Southwest Airlines , United Airlines , American Airlines and Delta Air , is off 7.5% just since the end of June. The iShares U.S. Transportation ETF (IYT), a collection of domestic airlines, railroads, and truckers, is down about 2% in 2024, while the S & P 500 has gained 14.2% this year. But investors are more positive on the supplier side of the industry. They suspect that manufacturers, and the aftermarket business in particular, could get a boost from a backlog in airplane deliveries from Boeing and Airbus that’s forced carriers to optimize the use of their existing fleet. As of July, Boeing had a multi-year backlog of $437 billion in commercial aircraft , equal to more than 5,400 airplanes. “We like the set up right now for the aerospace and defense markets, specifically the aftermarket,” said John Belton, portfolio manager at Gabelli Funds. “There’s an interesting secular backdrop where travel demand and air cargo demand is strong, even accelerating in certain cases.” Meanwhile, “new aircraft deliveries are slow, have paused for a variety of reasons, and it’s causing airlines and air freight companies to have to get better utilization of their existing fleet.” As a result, aerospace is “sort of an interesting sector with a unique cycle that’s currently seeing a lot of momentum, which should continue for the foreseeable future,” Belton said. What’s more, these investors say the future of commercial aerospace is bright as travel demand recovers to pre-pandemic levels, and as the rise in global travel offers a long-term tailwind. The International Air Transport Association (IATA), an airline trade association, said full year 2023 traffic reached 94.1% of 2019 levels. Put it all together, and here are some stocks set to benefit. AAR Corp. AAR Corp. , a $2.3 billion small-cap company that supplies aftermarket parts to the commercial aerospace industry, will benefit from the re-equipment cycle coming out of Boeing and Airbus, according to Nicholas Galluccio, portfolio manager at Teton Advisors. Shares have risen just 1.3% this year through Thursday, but Galluccio said AAR is a high quality asset that generates a lot of free cash flow. As of March, the stock was the fourth-largest holding in the Teton Westwood SmallCap Equity Fund (WESCX) , accounting for 2.6% of the portfolio, according to Morningstar. The fund has $81 million in total assets, with an expense ratio of 1.250%. “It’s harder to get new planes now, with all the regulations now, with the issues Boeing has had, so older planes are flying longer, and require more maintenance,” Galluccio said. “And AAR benefits from all the maintenance requirements to refurbish, and basically meet specifications of a lot of the aging aircraft that [are] flying.” The stock is also a consensus buy on the Street. Of the six analysts covering the stock, four rate it a buy and two a strong buy, according to LSEG. GE Aerospace GE Aerospace is a pure play on the rise of global air travel, according to John Belton, portfolio manager at Gabelli Funds. The aerospace stock, which began trading on its own on the New York Stock Exchange in April, has surged 67% this year following the split of General Electric into three separate companies . Belton said GE Aerospace is a “long-term compounder” that has plenty of upside, able to climb to $200 one year from now, up from $169.75 on Thursday. Nor is he alone. Just about all 18 analysts polled by LSEG consider GE Aerospace a buy, with five rating it a strong buy. Central to the investment thesis for GE Aerospace is its market leadership. GE Aerospace, which sells commercial engines to Boeing and Airbus, has a 30- to 40-year time period when it services the engines and their owners, Belton said. The aerospace company has an installed base of roughly 70,000 commercial and defense engines that represent roughly 70% of its recurring revenues. The GE revenue model “is based on number of hours and aircraft” in service, Belton said. “Airlines will come and go, and airline competition cycles will rise and fall, but so long as there’s demand for travel, there’s going to be airline businesses there.” “And so long as that is the case, they will be, by and large, using GE engines, and heavily incentivized to keep those engines going as long as possible and as frequently as possible,” Belton said. The stock held in the Gabelli Growth Fund (GABGX) , a large-cap growth fund that’s returned 22% this year, according to Morningstar. GE Aerospace is also a holding in the Gabelli Global Growth Fund (GICPX), as well as the Gabelli Growth Innovators ETF (GGRW) funds, Belton said. Boeing Elsewhere, Tony Bancroft, portfolio manager at Gabelli Funds, said that he is particularly bullish on Boeing after its selloff this year. The maker of the 737 Max passenger jet may be down almost 32% in 2024, but Bancroft said that represents a “big opportunity” for investors. “Near term, there’s probably going to still be a lot of volatility until we get this cap lifted from the [Federal Aviation Administration], and they’re starting to really pump out jets on a quality basis,” Bancroft said. “But that time will come, and I think they’re going to do very well going forward.” Bancroft runs the Gabelli Commercial Aerospace & Defense ETF (GCAD), an actively managed ETF that is up 20% this year. Boeing is one of the top holdings. Other companies in the same sector include Heico Corporation , Triumph Group and TransDigm Group. To be sure, among the risks to the air travel business is its sensitivity to the economic cycle, as well as outside risks such as war in Eastern Europe and the Middle East. Any hits to the supply chain could also affect the aftermarket business. Still, investors see no decline in people’s wanderlust and desire to mark off their bucket lists. “The air travel industry is a growth industry,” Galluccio said. “And it’s going to continue growing over time.”