US Airlines Incur Loss in 1H - Analyst Blog

By Zacks | September 04, 2012 AAA

The strong start to the year for the airline stocks was not enough to avoid them from suffering a loss in the first half of 2012. The Airlines for America (A4A) reported that the ten major U.S. carriers recorded a net loss of $1.07 billion in the first half of 2012. Profit margins deteriorated to a negative 1.5% from the year-ago level of negative 0.4%.

The industry has been struggling with rising fuel costs and economic uncertainties. Moreover, the deepening European debt crisis has affected almost all the key global economies. It appears that the trend will possibly continue this year. Volatility in fuel price is the major threat to the airline industry and that is beyond the control of the air carriers.  

Revenue for the North American airlines climbed 8.2% year over year with total expenses rising 9.4% primarily due to a 13.1% hike in fuel expenses. Fuel cost accounted for roughly 34% of the industry's costs in the first half.

The ten major North American carriers include Delta Air Lines (DAL), United Continental Holdings Inc. (UAL), US Airways Group Inc. (LCC), Southwest Airlines Co. (LUV), JetBlue Airways Corporation (JBLU), Alaska Air Group Inc. (ALK), Spirit Airlines Inc. (SAVE), Allegiant Travel Company (ALGT), Hawaiian Holdings Inc. (HA) and American Airlines, a subsidiary of AMR Corp. (AAMRQ). Excluding American Airlines, which has filed for bankruptcy protection in November last year, the air carriers have earned profit of $835 million in the first half.

We are already seeing the evidence of the disappointing first half profits in a pronounced downtrend in earnings estimates for the U.S. carriers. The current Zacks Consensus estimates of $2.09 and $2.69 for 2012 and 2013 for Delta are down from $2.20 and $2.93 a month ago, respectively. Like Delta, earnings expectations for United have also been trending down from $3.71 and $5.20 over the last month. Earnings estimates for United are currently pegged at $2.94 and $4.70 for this year and the next, respectively.

The Zacks Consensus estimates for Southwest have decreased by four cents (to 75 cents) for 2012 and by seven cents (to $1.02) for 2013 over the past one month. The earnings estimates for JetBlue have also fallen, with current EPS estimates of 51 cents and 65 cents for this year and the next, down four cents and three cents, respectively, over the past one month.

However, the North American airlines are banking on certain factors to boost their growth prospects as the year progresses. Tight capacity, rising travel demand and a number of new and enhanced ancillary revenues are the key catalysts. The carriers are successfully increasing the ticket prices that would boost passenger revenue per available seat miles, as they are also reducing their flying capacities in unprofitable markets. Hence, passengers have less choice and have to pay more for their travelling.

Additionally, efficient use of fuel-hedging strategies would benefit these carriers to combat rising fuel prices. Apart from cutting capacity, air carriers are further focusing on fleet rightsizing. In other words, carriers are replacing their older fleet, which are no longer feasible in a fuel-expensive environment, with new fuel-efficient aircraft. Though initially expensive, this seems the correct strategy to lower non-fuel costs. These measures would boost revenue growth and reduce non-fuel costs, thereby driving future profitability.

We currently have a Zacks # 2 (Buy) Rank for Hawaiian Holdings. Stocks such as Allegiant, Alaska, American Airlines, Delta, JetBlue, Southwest, Spirit and US Airways currently have a Zacks #3 (Hold) Rank. Nevertheless, we expect United Continental, which has a Zacks #5 (Strong Sell) Rank, to underperform the broader market.

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