Fuel Prices to Foil Airline Profits - Analyst Blog
March 15 2012 - 1:30PM
Zacks
The airline industry is currently struggling with higher fuel
prices and a slow moving U.S. economy. Fuel prices, though high
currently, remain well below the 2008 level of over $140 per barrel
that had ravaged the airlines industry.
The largest U.S. low-cost carrier, Southwest
Airlines (LUV), expects fuel costs of about $3.50 per
gallon for the ongoing first quarter. This is higher than its
previous expectation of $3.35 per gallon. In addition, the company
saw weaker-than-expected passenger revenue per available seat miles
growth of 4% in February compared with 7% in January. This
represents the smallest increase since last July.
The company launches fare sales from time-to-time, with
discounted ticket prices in order to boost sales. These actions,
however, hurt overall revenues.
As a result, Southwest is not expected to report profits in the
current quarter. The Zacks Consensus nevertheless estimates a
profit for the first quarter, which remains stable at 3 cents since
the year-ago quarter.
The second largest U.S. airline, Delta Air
Lines (DAL), expects fuel costs to grow $250 million in
the ongoing quarter. Operating margin is expected in the range of
1–3%, down from the previous expectation of 2–4%.
Although fuel cost will limit the carrier’s profitability, Delta
expects revenue growth to outpace the fuel cost. Delta also expects
unit revenue growth of 11–15% for the month of March.
The Zacks Consensus estimates loss of 2 cents for the first
quarter, representing a massive growth of 95% from the year-ago
quarter.
United Continental Holdings Inc. (UAL), the
largest U.S. airline, estimates fuel prices have risen 4% so far
this year. Hence, the company plans to cut 0.5–1.5% of its flights
this year. Previously, it expected to keep capacity relatively flat
and slightly down in the first quarter on a year-over-year
basis.
The Zacks Consensus Estimate for the first quarter is a loss of
46 cents, representing a substantial decline of 11.65% year over
year.
Overall, air carriers are taking profitable actions to endure
surging fuel prices and the ongoing market turmoil. They are
successfully passing on the increased cost to customers in the form
of fare hikes and effectively using fuel-hedging strategies to
combat the rising fuel prices. Delta Air Lines is offering
voluntary staff reductions to lower its overall cost and boost its
revenue.
Further, major carriers are cutting capacities, rightsizing
their fleets, and adding new features to their services as well as
introducing new products, which are enhancing their value and
profitability.
We prefer to maintain our long-term Neutral recommendation on
major carriers like Delta, United Continental and Southwest. For
the short term (1–3 months), the stocks retain the Zacks #3 Rank
(Hold).
DELTA AIR LINES (DAL): Free Stock Analysis Report
SOUTHWEST AIR (LUV): Free Stock Analysis Report
UNITED CONT HLD (UAL): Free Stock Analysis Report
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