Tumbling Energy Prices Could Lift Airline Profits

Just as rising energy prices have pummeled earnings for airlines, the recent drop in jet fuel prices may give an unexpected boost to earnings for the third and fourth quarters and into next year.

Airline analysts predict that falling oil prices should benefit carriers in a big way, even if demand slows and the ability to increase fares weakens.

Analyst Jamie Baker with J.P. Morgan Securities Inc. estimated last week that spot prices for jet kerosene had dropped 55 cents a gallon from August highs. On an annual basis, that decline would save airlines $10 billion in jet fuel costs, Mr. Baker said.

The current level of fuel prices "all but ensure meaningful industry earnings growth in 2007, except under the most draconian demand scenario," Mr. Baker said.

That good news may offset statistics from August that showed that unit revenues - the average fare per seat per mile flown - didn't grow as much last month as in previous months.

Airlines have been pushing up fares through 2006, but rising fuel expenses ate up much of their increased revenues. Through the end of July, U.S. carriers saw their fuel costs rise to $21.88 billion, up $4.37 billion or 25 percent from the same period in 2005, according to the Air Transport Association of America.

That increase can't be explained by more flying. Airlines actually cut their fuel usage to 11.69 billion gallons, down 534.3 million gallons or nearly 5 percent from the same seven months in 2005.

With fuel consumption this year estimated to be around 19 billion gallons for U.S. carriers, each penny in fuel price raises or lowers expenses by $190 million for the industry.

Less growth

The Air Transport Association last week reported that unit revenues on domestic flights increased 10.3 percent in August compared with a year earlier. That's its slowest year-over-year growth since March, when the group reported a 10.1 percent increase.

JetBlue Airways Corp. on Thursday projected that its unit revenues would increase 13 to 15 percent, not the 18 to 20 percent that analysts had been expecting.

However, that less rosy projection "is entirely offset by a lower fuel price ($2.20/gal goes to $2.10/gal)," analyst Michael Linenberg of Merrill Lynch stated in a Friday report. As a result, he didn't change his estimate that JetBlue would have a small loss under $1 million, despite the disappointment on revenues.

Mr. Baker of J.P. Morgan raised his earnings estimates for JetBlue even though the unit revenue wasn't as strong as first projected. He wrote that the company was "sounding what has become an increasingly popular refrain: less RASM [revenues per available seat mile], cheaper fuel." Available seat miles, which measure airline capacity, are the number of seats multiplied by the number of miles flown.

Mr. Baker estimated that with jet fuel at $1.90 a gallon, American Airlines Inc. parent AMR Corp. would have flat earnings in 2007 compared with this year only if demand dropped 4 percent in 2007.

"Given continued consensus forecasts for GDP [gross domestic product] growth in 2007, we believe 4 percent demand improvement is the more likely outcome for AMR, implying roughly $6.00 in un-taxed earnings," he said.

Rising stocks

As fuel prices have fallen, stock prices of many airline companies have gone up. Since Aug. 14, shares of Fort Worth-based AMR have increased 25.9 percent, and Continental Airlines Inc. shares have seen a 29.6 percent rise. US Airways Group Inc. is up 20.7 percent, followed closely by the 19.6 percent jump for shares of UAL Corp., parent of United Airlines Inc.

However, several airline stocks went down in the same time period. JetBlue shares fell 3.4 percent, and Dallas-based Southwest Airlines Co. dropped a tenth of a percent. AirTran Holdings Inc., which warned of weakening demand Sept. 7, has seen an 8.9 percent decrease.

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