Warren Buffett once said, “buy when there’s blood on the streets.”
The S&P 500 and NASDAQ have been ugly over the past month, but the airline industry is among the worst-hit industries. Russia’s invasion of Ukraine sent jet fuel prices to all-time highs of around $175 per barrel, China’s lockdowns have dampened demand for airfreight, and a potential recession could reduce demand for passenger air travel.
The U.S. Global Jets ETF (JETS) is trading down nearly 25% over the past 52 weeks—far more than the modest 1.79% drop in the S&P 500 index and double that of the hard-hit and tech-heavy NASDAQ Composite index.
Of course, Buffett’s advice doesn’t mean that everyone should invest in the hardest-hit industries—many stocks are down for a reason. Rather, it means that there are usually under-valued opportunities in these hard-hit industries.
A Recession-Proof Airline?
Most cargo and passenger airlines are dependent on market demand. When there’s a lot of cargo or people to move, demand outstrips supply and prices increase to reach an equilibrium. But, of course, the downside is that prices fall sharply when demand slows down. And, that’s what’s happening to airlines in today’s turbulent environment.
But that’s not necessarily the case for every airline.
Global Crossing Airlines Group Inc. (NEO: JET) (OTCQB: JETMF), better known as GlobalX, operates a charter airline serving the U.S., Caribbean, and Latin American markets. Unlike commercial airlines, many of its customers have to fly regardless of economic conditions (think government officials or college football teams).
After spending 2020 getting certified, the company began flight operations in August of 2021. And by December, it operated 730 revenue flights with 1,700 block hours for nearly two-dozen customers, generating $11 million in revenue during the fourth quarter. Recently, the company reported first-quarter revenue that rose a further 45% to $16.3 million.
The company’s largest customer segment is U.S. government contractors with 4,950 hours booked in 2022, along with 9,360 more hours in 2023 and 2024. Colleges and incentive travel account for another 1,900 hours booked in 2022. In aggregate, the company’s total bookings (LOIs) have already locked in more than $70 million in 2022 revenue.
What About Fuel Costs?
The profitability of most airlines depends on the price of jet fuel, which is another big reason airlines are trading in the red. Jet fuel prices have soared to all-time highs, eating into the margins of many commercial airlines. And while some airlines hedge fuel costs, predicting oil prices is a risky business, and most only hedge some of their fuel requirements.
GlobalX primarily uses full (cost-plus) contracts for its flights, which pass on the cost of fuel to its customers. That way, the company removes volatile fuel prices as a risk factor in its financial models. While a portion of its contracts are ACMI, the company projects reaching profitability by the third quarter of 2022 when factoring in record jet fuel prices.
Since fuel prices don’t have a significant effect on its profitability, GlobalX has a fairly straightforward business model: The company generates $1.5 to $2.2 million in annualized gross profit before overhead per passenger aircraft and $4.2 to $5.5 million in annualized gross profit before overhead per cargo aircraft—making it a numbers game.
Expansion Plans Underway
GlobalX plans to expand from 10 passenger aircraft in 2022 to 25 passenger aircraft by 2025. At the same time, the company aims to have two cargo aircraft operational by October 1 with plans to expand to 25 aircraft by 2025. To execute these plans, the company has an $18 million annualized G&A that will grow 10% annually to support growth.
There are two other important factors to note:
- The FAA requires a lot of upfront expense to certify aircraft and these expenses have already been largely incurred, meaning new aircraft will go into operation without significant levels of additional expenses.
- The company’s overall expenses don’t scale linearly with the number of aircraft—they’re a marginal expense. In other words, the company will become more profitable as its fleet expands due to economies of scale.
In short, the company has laid the foundation for growth in 2022 and beyond by going through all of the regulatory red-tape, hiring the right people, and proving out its model on a small scale. The company investors are buying right now is one on the verge of achieving profitability during the third quarter and scaling up to a fleet of 50 aircraft by 2025.
The Bottom Line
Global Crossing Airlines Group Inc. (NEO: JET) (OTCQB: JETMF) is a unique airline with recession-proof and oil price-insensitive properties. Since the stock has been punished alongside its peer group, investors have an opportunity to build a position while blood is still on the street.