We have recently become more bullish on the airline sector, as we see both cyclical and secular drivers which appear likely to enhance the potential earnings power of the industry. Over the last several months, key metrics for the airlines have displayed a very positive trend. Traffic growth (demand) has shown steady year over year improvements, while capacity growth (supply) has been muted. Improvements in GDP and corporate profits have driven the demand side of the equation and are expected to continue going forward. The result of this supply/demand dynamic has been increased pricing power for the airlines, which has been clearly demonstrated as unit revenue growth metrics have strengthened considerably. From a longer term perspective the supply side of the equation looks favorable as well. The industry has experienced meaningful consolidation in recent years, and more airlines have been joining the three major global alliances. Furthermore, domestic airlines have been very disciplined with regards to ordering new aircraft. With both major aircraft manufacturers sold out over the next few years, capacity growth in the US should remain muted. We are therefore enthusiastic about the prospects for the space and have added to our portfolios accordingly.
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