Andy Hagans sits down for an interview with Frank Holmes, CEO of U.S. Global Investors.
ETF Reference editor in chief Andy Hagans recently interviewed Frank Holmes, CEO of U.S. Global Investors. Mr. Holmes also serves on the investment committee of the International Crisis Group and is an advisor on sustainable development to the William J. Clinton Foundation. The interview was completed over email in May and June of this year.
Andy Hagans: Your firm obviously has a large footprint in the mutual fund industry; recently, you launched your first ETF, the U.S. Global Jets ETF (JETS). Why did you decide to expand into the ETF space?
Frank Holmes: ETFs are the newest wave of how money is being invested today, and we wanted to be sure to offer this important tool to our clients and investors. If we brought out a new product, we wanted to use the newest wrapper. Many of the classic ETF vs. mutual fund arguments apply lower fees, tax efficiency, and transparency.
Andy Hagans: Two years ago, Warren Buffett said the following at a Berkshire Hathaway meeting: “Investors have poured their money into airlines and airline manufacturers for 100 years with terrible results… It’s been a death trap for investors.” Do you agree with Mr. Buffett in regards to the industry’s historical performance?
Frank Holmes: There’s no question that airlines have historically been a bad investment—it’s tough to argue with the facts. But the industry has changed substantially since Mr. Buffett was quoted. Airlines have undergone significant consolidation, while cost-cutting has fattened bottom lines and increased free cash flow, in many cases enabling companies to reward shareholders with dividends.
Andy Hagans: What structural changes are occurring right now in the airline industry? How do these changes affect the industry’s investment thesis?
Frank Holmes: Along with the cost-cutting and consolidation that has been taking place throughout the industry, ancillary (non-ticket) revenues are way up. Charges for extras such as checked baggage, priority boarding, wi-fi, on-board meals, and extra-legroom have all increasingly contributed to airlines’ earnings. While global ancillary revenue for 2007 was just $2.45 billion, by 2013, it had risen to $31.5 billion and continues to rise.
Another important factor to consider is the rapid expansion of the middle classes throughout the developing world. This is one of the biggest stories in capitalism today. These people are earning more and spending more, in many cases, on travel and vacations, and because JETS is a global airline ETF, it is poised to reap the benefits of this shift in travel patterns.
Andy Hagans: Fees, fees, fees! Charging for wi-fi, extra legroom, checked baggage, and so forth has hugely increased the operating margins for many airlines. Have consumers reached a limit in terms of their ability (and patience) to accept these additional fees? Or are there additional opportunities for airlines to expand margins even further?
Frank Holmes: Ancillary fees aren’t going away anytime soon. They have been a key component in profitability for the airlines, and customers are becoming used to the unbundling of services. Passengers accept these fees more when they deliver added value and enhance their flying experiences, such as wi-fi or priority boarding.
Andy Hagans: Crude oil has bounced a bit off its recent low, but not much. Aside from the increase in airline industry profits, what are some less obvious or secondary effects of a prolonged dip in fuel prices? And how does it affect the order books for aircraft manufacturers?
Frank Holmes: Lower fuel prices have certainly positively impacted the airline industry’s costs in the short-term, but the companies are not making any big changes to longer-term strategies such as fleet planning and capacity. They prefer to use the extra cash to pay down debt.