Fuel may cloud airlines' profit
As U.S. airlines begin reporting their quarterly results this week, investors may learn whether they should look forward to the rest of the year with cheerful anticipation or creeping dread.
The same can be said for companies in most sectors of the economy. But what makes the airline industry different from many others is how much its health depends on the price of oil.
A penny difference in the price of a gallon of jet fuel increases or decreases American Airlines Inc.'s annual expenses by about $28 million, for example. In a late June update to investors, parent AMR Corp. estimated that its 2011 fuel price will be $3.02 a gallon, up 71 cents from 2010 - or about $2 billion.
With fuel costs sharply higher, airlines have depended on steady demand from travelers to keep their profit potential from taking a dive. Analysts will be looking for signs about whether that strength so far in 2011 will continue in the second half.
"We expect 2Q11 airline earnings season to be defined by concern over fuel prices, talk of willingness to cut capacity (but no material capacity cut announcements), and better commentary on July/August demand trends compared to what was a largely disappointing June," analyst Hunter Keay wrote Friday in a report.
"However, we think the slightest indication of continuing demand softness will be met with aggressive selling," he added.
Senior aerospace analyst Ray Neidl of the Maxim Group worried that slowing economic growth and other problems would sidetrack airline profits.
"We expect a very strong travel period for the next two months producing good profitability for Q2 and possibly Q3, normally the industry's best quarters," Neidl told investors in a report last week.
"However, we have become much more concerned post-Labor Day as the normally slow fall travel period comes in," he wrote. "This year it could be amplified by high fuel costs, a lack of consumer and business confidence, which will lead to declining demand."
AMR is scheduled to lead off the earnings reports when it releases results on Wednesday. It is expected to be the only major U.S. carrier to post a loss for the three months ended June 30.
Consensus among analysts is that AMR will lose 73 cents a share, or about $243 million.
A number of carriers have seen analysts reduce their earnings estimates in the past month, even if they are expected to remain in the black.
Analysts expect Southwest Airlines Co. to earn 21 cents a share, or about $166 million, for the quarter, during which it closed its purchase of AirTran Holdings Inc.
The largest U.S. passenger airline company, United Continental Holdings Inc., is projected to earn about $1.51 a share, or close to $600 million, before special charges and one-time items. The parent of United Airlines Inc. and Continental Airlines Inc. advised investors last week that such items will cause a $39 million hit to earnings.
The No. 2 carrier, Delta Air Lines Inc., is expected to earn 48 cents a share, or just over $400 million.
Even with the industry overall expected to report solid profits, share prices for Southwest, AMR, Delta and US Airways Group Inc. all hit 52-week lows Friday, and AMR briefly dipped below $5 Friday for the first time in nearly two years.
Analysts say concern over the economy, fuel prices, travel demand and other issues are helping drive down the price of shares.
"Airline stocks have been hammered this year on volatile oil prices and economic uncertainty concerns," analyst Michael Derchin of CRT Capital Group Inc. wrote in an earnings preview.
"The market has totally ignored the positive changes that have occurred within the industry such as capacity discipline, consolidation, ancillary revenue programs, global alliances with antitrust immunity, and deleveraging," Derchin wrote.