Airlines' Outlook Less Rosy Due to Fuel Costs

Apr. 30 -- There is a growing pessimism -- or perhaps, a shrinking optimism -- about the prospects for airline earnings for the rest of 2007.

Most airlines are expected to make money this year, but higher fuel prices, leveled-off demand and little or no prospects for airfare increases on domestic routes have wiped the big smiles off the faces of many airline executives.

As one U.S. carrier after another reported first-quarter earnings this month, industry analysts have been steadily cutting airline earnings estimates for the second quarter and the full year.

A number of carriers reported their first profit for the March quarter since 2000, and some airlines last year reported their annual profit since 2000. Although fuel prices reached historic highs, airlines were able to raise fares significantly in 2006.

However, fares, particularly on domestic routes, have leveled off, and carriers say that they seem to be bumping the ceiling of what customers will tolerate. Both United Airlines Inc. and US Airways Group Inc. indicated this week they'll cut capacity in the latter part of 2007.

"It's not as if we feel terrible about the domestic business environment," US Airways chairman and chief executive Doug Parker told analysts Thursday.

"What you're hearing is us saying that it's flattening or extremely difficult to actually raise fares as costs go up because of the environment."

Analysts now expect AMR Corp., parent of American Airlines Inc., to earn $1.68 per share in the current quarter. That's down 18 percent from the $2.06 per share consensus on March 30, according to analysts surveyed by Thomson Financial. For the full year, the consensus has dropped to $4.12, down 15 percent from March 30.

Southwest's estimates

Estimates for Southwest Airlines Co. earnings have fallen 21 percent for the quarter, from 34 cents to 27 cents. For all of 2007, Southwest's estimates fell 16 percent, from 88 cents a share to 74 cents, according to Thomson Financial.

Over the past four weeks, estimates have also trended downward. JetBlue Airways Corp., for example, has seen its earnings projections slashed 32 percent for the second quarter and 34 percent for the year.

Shrinking optimism

On Friday, J.P. Morgan analyst Jamie Baker lowered his ratings for a number of airline companies, citing fuel costs and "softer revenue assumptions." In a report, Mr. Baker said he hasn't heard the "positive demand chatter" he expected.

"In fact, the opposite was true, with a growing body of evidence that domestic RASM [revenue per available seat per mile, or unit revenue] is neither up to snuff nor likely to improve soon," Mr. Baker said.

"Managements bicker over whether weak demand or aggressive supply is to blame for increasingly poor domestic RASM trends," he said. "We don't particularly care in the near term as the industry is ill-equipped to respond quickly either way."

Other downers

Among the other factors combining to dampen enthusiasm for the airlines:

--The recent rise in jet fuel. US Airways, for example, says it'll probably spend $300 million more for fuel in 2007 than the carrier had estimated at the first of the year.

--Weather-related problems in the first quarter, with more disruptions in April. AMR estimated that winter storms reduced its revenue at American and regional unit American Eagle by $60 million in the first quarter, and Southwest said the storms carried a price tag of $30 million in added costs and reduced revenue.

Continental put the storms' impact at over $10 million; UAL Corp., parent of United Airlines, $32 million; and US Airways, $30 million to $35 million from weather and problems combining the reservations systems of US Airways and America West Airlines.

--The prospect of higher labor costs. Several airlines are negotiating new contracts with their unions, including the pilots' unions at American and Southwest.

Prices for airline shares, which had soared early in the year on lower fuel prices and speculation about airline mergers, plummeted last week on the downward earnings estimates and rising fuel prices.

On Friday, the Dow Jones Wilshire U.S. Airline Index and the American Stock Exchange Airline Index were each down 4 percent for the day.

AMR shares fell 4.8 percent to $26.35 for the day, and were down 35 percent from a Jan. 19 high of $40.66.

Shares in Southwest Airlines were down 1.5 percent.

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