Airline Earnings: Not So Bleak?

Posted by: Justin Bachman on October 14

I spent a few days off in Texas, and returned to find generally upbeat assessments about the airlines’ pending income reports. Those red-ink recitations – um, I mean earnings releases – commence Oct. 15 for the airlines and it looks like crude oil’s dramatic tumble has been manna from heaven. What a long, strange trip for airline executives, riding barrel prices from $147 in July to $79 today.

The largest carrier, AMR’s American Airlines, will kick it off Wednesday, along with Delta Air Lines (DAL). Wall Street expects a loss from American, while Delta may break even. In fact, with all the financial chestnuts that have been laid in for a very harsh winter, U.S. airline stocks may even present an attractive buying opportunity next year, according to two analysts.

“Our neutral rating on the industry since early summer has been justified, with airline stocks generally trading sideways until the recent credit crisis decline after hitting July lows, but by early winter we believe the industry should become attractive once the ‘fear factor’ from the credit crisis passes,” Calyon Securities analyst Ray Neidl wrote in an Oct. 13 note. That fear, however, has taken corporate travel bookings down 10%-20% in the past two weeks, Credit Suisse (CS) analyst Daniel McKenzie wrote in a report the same day, citing industry sources. He’s optimistic, for the most part, because airlines have shown focused zeal about pulling capacity out of the domestic system this year, an effort that has touched all players in one way or another. He thinks the airlines will maintain this discipline for four reasons:

1. A need to be conservative about debt as the legacy players look to fleet renewal spending in the next few years.
2. Volatile fuel prices
3. Low-cost rivals still enjoy a 20%-40% nonfuel unit cost advantage
4. Consolidation is still likely in the future

Couple those issues with falling fuel bills and relatively strong cash positions and you have the recipe for a decent outlook. As an aside, about that Texas respite, I took four flights for the trip at off-peak times and each was stuffed to the gills. I mean, middle-seat hell. So whatever panic may have gripped our thoughts about financial markets has apparently not trickled yet into our travel plans.