ETFs

Transportation Sector To Feel Volcanic Wrath

European airspace that was closed due to the volcanic eruption in Iceland is expected to reopen to flights today after experts stated that planes could fly through thinner parts of the ash, however this move will likely do nothing to boost the tarnished transportation sector.

According to major European airlines, this natural disaster has been a financial catastrophe to airlines and their counterparts.  Aggregately, 81,000 flights have been canceled or rescheduled costing airline carriers nearly $300 million a day in lost revenues.  Air France-KLM announced that it was losing nearly $47 million a day due to grounded airplanes; British Airways Plc, the largest air carrier between London and New York reported to lose $30 million per day; Australian airline giant Quantas Airlines lost nearly $1.4 million on a daily basis; Thai Airways International Pcl stated that it was losing $3.1 million per day of downtime.

Grounding of aircraft also forced Delta Airlines (DAL), the world’s largest airline carrier, to cancel nearly 130 flights through European airspace.  Additionally, the world’s largest package-delivery firm, United Parcel Service (UPS), was forced to re-route deliveries and transport to European destinations via ground support.

Although numerous test flights conducted by various airline carriers indicate that the current blanket restrictions on airspace is unnecessary and a green light has been given to fly, the ash cloud from the eruption of Eyjafjallajökull could potentially still be detrimental and conditions appear to be getting worse in some parts of Europe. 

One reason the ash poses a threat is because of its impact on aircraft engines.  Ash can be sucked into jet engines where it can melt and turn into molten glass and cause malfunction.  Not only is this a potential safety hazard, but it is extremely costly to repair and replace these airplane engines.

In a nutshell, this natural disaster has dealt a blow to an industry that has been struggling to seek profitability during times when crude oil witnessed all time highs and a global financial meltdown crippled consumer spending.  The sector is likely to suffer the financial and economic consequences of an event that was completely out of its hands for some time to come.

An exchange traded fund (ETF) which is most likely be heavily influenced by this volcanic eruption is the Claymore/NYSE Arca Airline (FAA), which holds 25 different airline carriers including Delta, Quantas and British Airways.  FAA is down nearly 2.8% over the past week and closed at $35.85 on Monday.

If invested in airline equities, the use of an exit strategy which identifies price points at which upward trends could be ending is of importance.  Such a strategy can be found at www.SmartStops.net.

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