U.S. Airlines Poised for Record Profits

The Air Transport Association of America expects industry profit to be $4 billion this year.


If everything goes perfectly - and that is a big if - the U.S. airline industry could report record profits this year.

Be warned, though: Airline stocks are mostly speculative investments, and it is easier to lose money than to make it, given the industry's past performance.

The Air Transport Association of America, an airline trade group, expects industry profit to be $4 billion this year, which is an improvement over modest operating profit last year. But some analysts think that the industry could top the record of about $5.4 billion in profit, set in 1999.

Those profit projections, and a recent decline in airline shares, have some analysts recommending airline stocks as cheap and likely to rally as profits pile up.

''It's time to buy the airlines again,'' Bob McAdoo, an analyst at the Prudential Equity Group, told clients in a March report. He has perhaps the most bullish view among Wall Street airline analysts, with 2007 profit projections that would easily set an industry record.

Even with just a modest industry recovery thus far, some airline stocks have staged remarkable advances. American Airlines, for those prescient enough to snatch up shares near the bottom of $1.25 in March 2003, hit $41 recently. They closed Monday at $30.33 a share.

Continental Airlines, at $3.65 in October 2002, hit $52.40 recently. On Monday, the stock closed at $36.05. And US Airways more than tripled after its September 2005 stock offering, to $63.27, before settling back in recent weeks. It finished Monday at $45.05.

While those are impressive gains, a bet on Delta Air Lines or Northwest Airlines, which both filed for bankruptcy protection in 2005, meant a total wipeout for investors.

But as Delta and Northwest plan to exit bankruptcy proceedings in coming months, they will convert creditors' claims into new stock.

Initial estimates put Delta's market capitalization at $10 billion and Northwest's at $8 billion.

United Airlines, a unit of UAL Corp, emerged from bankruptcy about a year ago with new shares of its own.

The bankruptcies, along with efforts by airlines not in bankruptcy, have drastically reduced labor costs and some other expenses. A sharp reduction in the combined fleets of big carriers, meanwhile, curbed capacity just as a growing economy stimulated demand for airline tickets. So planes are mostly full and airlines have been able to raise fares - by about 15 percent last year alone.

All of that has meant profit again for an industry that racked up more than $30 billion of losses after Sept. 11, 2001. Last year, with the exception of big reorganization charges that produced losses at Delta and Northwest, was a modestly profitable year.

If oil prices spike again, or the economy falters, profit could be modest once more this year.

McAdoo, the Prudential analyst, is an optimist, and he would have to be, spending more than 30 years either working for airlines or following their stocks on Wall Street.

McAdoo projected that American Airlines would record a profit of $1.85 billion this year, roughly $500 million higher than some other analysts' estimates. And he put an $88 target price for later this year on US Airways, implying a 95 percent leap from the close Monday.

Supporting his generally upbeat view, very few new planes are scheduled for delivery to domestic airlines this year or next, which should keep capacity tight and possibly allow further fare increases.

The U.S. economy, though not roaring at this point, continues to grow, and that typically means strong demand for airline tickets. And airlines continued to reduce costs during 2006, so the industry enters this year leaner as a whole.

Even Philip Baggaley, who, as a debt analyst at Standard & Poor's, is paid to worry about the downside of the airlines, said, ''It'll be the best year since the 1990s, unless the economy really falls out of bed.''

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