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Market Focus
Fuel Prices Likely To Cause Continued Airline Financial Bloodletting
Aviation Week & Space Technology
01/31/2005, page 8
Joseph C. Anselmo
Washington
MARKET FOCUS
Fasten your seat belts for what is shaping up to be another year of financial bloodletting for the U.S. airline industry. A spate of fare reductions led by Delta Air Lines should make legacy carriers more competitive in the long run, but it's forcing them to rack up bigger losses in the near term. And stubbornly high oil prices threaten to drive those losses to mammoth levels and choke off a profit recovery that analysts had forecast for 2006. Even successful low-cost carriers are seeing their margins squeezed by fuel costs and stiffer competition from legacy carriers. "We believe that most carriers will struggle to even match weak results from 2004 during 2005," predicts Lehman Brothers analyst Gary Chase.
The biggest blow comes from oil prices, which show no signs of declining to anywhere close to the $30 a barrel benchmark that would allow the industry to begin posting profits for the first time since 2000. Merrill Lynch last week raised its oil price assumption for 2005 by 13% to $45 a barrel and reduced earnings forecasts--or in most cases increased loss estimates--for half of the 18 carriers it covers. The firm now expects U.S. airlines to post a cumulative pre-tax loss of $3.4 billion in 2005, up from its earlier estimate of $1 billion. "High oil prices will accelerate an industry restructuring that is long overdue," says analyst Michael Linenberg. "Some carriers will be forced to retrench further and some may even go out of business."
That view is shared by Fitch Ratings, which believes a continuation of high fuel prices could deliver a knockout blow to struggling airlines such as US Airways and Independence Air. In fact, the only major carrier significantly buffeted from oil price shocks is Southwest Airlines, which has hedged 85% of its fuel costs at $26 a barrel.
The dismal climate has triggered a massive sell-off of airline stocks, many of which are down 25% or more since the year began. But some analysts are starting to question whether the "correction" has gone too far.
Indeed, Continental Airlines' stock staged a modest recovery last week after a 38% decline from the start of the year. JP Morgan analyst Jamie Baker, noting past trends, thinks Continental's stock will fully rebound to $14 a share by next January. "One investor remarked to us that she had never seen it this bad," Baker writes. "She's new."
Linenberg continues to rate "financially formidable" Southwest and JetBlue Airways as "buys," expecting that the two low-cost carriers will be the best positioned to capitalize on any industry shakeout.
Fuel Prices Likely To Cause Continued Airline Financial Bloodletting
Aviation Week & Space Technology
01/31/2005, page 8
Joseph C. Anselmo
Washington
MARKET FOCUS
Fasten your seat belts for what is shaping up to be another year of financial bloodletting for the U.S. airline industry. A spate of fare reductions led by Delta Air Lines should make legacy carriers more competitive in the long run, but it's forcing them to rack up bigger losses in the near term. And stubbornly high oil prices threaten to drive those losses to mammoth levels and choke off a profit recovery that analysts had forecast for 2006. Even successful low-cost carriers are seeing their margins squeezed by fuel costs and stiffer competition from legacy carriers. "We believe that most carriers will struggle to even match weak results from 2004 during 2005," predicts Lehman Brothers analyst Gary Chase.
The biggest blow comes from oil prices, which show no signs of declining to anywhere close to the $30 a barrel benchmark that would allow the industry to begin posting profits for the first time since 2000. Merrill Lynch last week raised its oil price assumption for 2005 by 13% to $45 a barrel and reduced earnings forecasts--or in most cases increased loss estimates--for half of the 18 carriers it covers. The firm now expects U.S. airlines to post a cumulative pre-tax loss of $3.4 billion in 2005, up from its earlier estimate of $1 billion. "High oil prices will accelerate an industry restructuring that is long overdue," says analyst Michael Linenberg. "Some carriers will be forced to retrench further and some may even go out of business."
That view is shared by Fitch Ratings, which believes a continuation of high fuel prices could deliver a knockout blow to struggling airlines such as US Airways and Independence Air. In fact, the only major carrier significantly buffeted from oil price shocks is Southwest Airlines, which has hedged 85% of its fuel costs at $26 a barrel.
The dismal climate has triggered a massive sell-off of airline stocks, many of which are down 25% or more since the year began. But some analysts are starting to question whether the "correction" has gone too far.
Indeed, Continental Airlines' stock staged a modest recovery last week after a 38% decline from the start of the year. JP Morgan analyst Jamie Baker, noting past trends, thinks Continental's stock will fully rebound to $14 a share by next January. "One investor remarked to us that she had never seen it this bad," Baker writes. "She's new."
Linenberg continues to rate "financially formidable" Southwest and JetBlue Airways as "buys," expecting that the two low-cost carriers will be the best positioned to capitalize on any industry shakeout.
