Joined: 24 Dec 2006
|Posted: Sun Jan 21, 2007 11:26 am Post subject: Airlines flying high as profit set to take off
|Falling fuel costs and a surge in travel demand expected to result in strong earnings for 2007
By Julie Johnsson
Tribune staff reporter
January 20, 2007
After years of heavy losses, U.S. airlines are poised for a big rebound, driven by strong interest in travel and falling oil prices.
In a sign that carriers finally have emerged from the turbulence that followed the 9/11 attacks, American Airlines and Continental Airlines have reported an annual profit for the first time in years.
And United Airlines, which flirted with liquidation during its three-year bankruptcy, is expected to show a profit for the first year since 2000 when it reports 2006 earnings on Tuesday.
In all, the 10 largest U.S. carriers combined should post a 2006 gain of between $1.4 billion and $1.7 billion, predicts AirlineForecasts, a Washington, D.C.-based consulting firm.
This year's results stand to be even better. Fuel, the second-largest operational expense for most airlines, after labor, is becoming more affordable as oil prices drop. Plus, carriers like United are starting to reap the results of expense cuts made to survive the downturn.
Those top airlines stand to make a total of $5.9 billion in 2007 if crude oil averages $55 per barrel, according to AirlineForecasts. They should make a cumulative $6.9 billion in 2008 if fuel prices stay at current levels. On Friday, crude oil closed at $51.99 per barrel.
"The moderation of oil prices is starting to reveal the progress that's been made in [cutting] non-energy costs of the business," said Robert Mann, president of R.W. Mann & Co., an airline consulting firm based in Port Washington, N.Y.
Airlines' bottom lines could improve further if one or more of the mergers contemplated by some of the industry's biggest players are consummated, observers say.
Still, analysts are nervous about U.S. carriers' long-term prospects.
Oil prices remain volatile, and there's no guarantee the current pricing will hold. And every penny increase in jet fuel strips about $190 million from the industry's earnings, according to a recent report by Merrill Lynch.
After losing more than $35 billion between 2001 and 2005, airlines also need to make money, and a lot of it, to replenish their fleets and invest in infrastructure to keep pace with deep-pocketed overseas rivals such as Emirates Airline and Singapore Airlines.
"These guys ought to be minting money, which they're not," said Mann.
Then there's labor. Workers at United, American and other airlines who gave up one-third or more of their salaries to keep the carriers aloft are agitating to reclaim lost wages.
American Airlines is preparing for contract talks with its pilots, whose contracts expire in 2008. If American's pilots gain generous new terms, unions at other airlines are expected to seek similar contracts, at a steep cost to the carriers.
"Labor will come roaring back," predicted Vaughn Cordle, president of AirlineForecasts. He anticipates that new contracts could eat up more than half of airlines' net earnings after 2008.
Analysts also expect airlines to pass some of their savings back to consumers by lowering ticket prices. Cordle estimates that the 10 largest airlines will pocket about half of the $2.8 billion they'll save if oil stays at around $55, about $10 per barrel below 2006's average price.
"In other words, consumers capture the bulk of the lower fuel costs," he said.
But such discounting isn't in evidence yet, said Glen Stewart, president of Northbrook-based Gray's Travel Management. He notes that it costs upward of $600 to fly round trip from Chicago to Des Moines, a route where United and American face no competition from discount carriers.
"Where [airlines] can get it, they're going to get it," Stewart said. "It's not all bad. We want them to all stay healthy."
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Low fuel costs a boon for airlines
If oil prices remain in the mid-$50-a-barrel range, airlines could see a surge in profits this year.
CRUDE OIL Price per barrel
Friday's close: $51.99
PROJECTED 2007 AIRLINE EARNINGS For top 10 airlines
2006 $1.4-$1.7 billion
2007 $5.9 billion
BREAKDOWN AIRLINE PROFIT MARGIN
$1.2 billion Northwest 9.3%
$718 million Southwest 7.3
$1.3 billion American 5.7
$593 million US Airways 5.0
$172 million Alaska 4.9
$604 million Continental 4.6
$101 million JetBlue 3.6
$584 million Delta 3.2
$605 million* United 3.1
$66 million AirTran 3.1
Avg. oil price
2007 Hypothetical $55
Sources: AirlineForecasts, Bloomberg