Airlines Set to Turn Profits
Even though the troubled economy has dimmed the 2009 outlook for most sectors, airlines are poised to equal their most profitable year this decade, according to a veteran airline industry analyst.
FTN Midwest analyst Mike Derchin said he expects carriers to produce net income of $5 billion next year, equaling the 2007 level, assuming oil is at $80 a barrel, revenue per available seat mile grows at 8% to 9%, and domestic capacity is reduced by 8% to 9%.
With similar metrics currently in place, Derchin also expects the industry to report a small profit for the fourth quarter.
“Consolidation has begun, resulting in a sharp reduction in capacity and higher average fares,” he wrote in a research report. “Managements are focusing on core operations, eliminating noncore flights and grounding inefficient fleets.”
Ironically, the U.S. airline industry is in a strong position because it began to reduce capacity early this year in response to high oil prices. Capacity showed slight declines in the first three quarters, but in the fourth quarter, growth by the three principal low-fare carriers slowed to zero, resulting in an industrywide decline of 9%. Now fuel prices are falling, as is demand, but reduced capacity means current booking load factors are generally flat.
Additional favorable trends include the merger between Delta(DAL Quote – Cramer on DAL – Stock Picks) and Northwest, which was approved by regulators last week. It “is expected to result in additional capacity removed in 2009,” Derchin said.
The five remaining legacy carriers have formed alliances with foreign carriers, with antitrust immunity likely, enabling coordinated pricing and scheduling. And “numerous marginal carriers have gone into liquidation,” further reducing capacity.
“There may be worst cases, but most airlines have done what needs to be done to get back to profitability,” said US Airways CEO Doug Parker in a recent interview.
After posting net income of $2.5 billion in 2000, the industry lost $35 billion in the next five years, then made $3.1 billion in 2006 and $5 billion in 2007, according to the Air Transport Association. Through the first three quarters of 2008, airlines lost about $4.8 billion, the ATA said.
A recent report by Avondale Partners analyst Bob McAdoo says airlines still trade at the same prices as they did when oil cost $120 to $125 a barrel, even though it now sells for half that.
“Investors seem convinced that the recession will outweigh the positives from lesser capacity and $65 oil,” McAdoo wrote. “Looking back, recessionary airline revenues have only dropped about 1.2%, even during the most severe economic downturn of the last couple of decades. Combining today’s jet fuel costs with capacity cuts, even with an assumed recessionary revenue shortfall of 2.0%, still leaves the airlines with near record profits.
Source: TheStreet.com
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