CHARLOTTE, N.C. (TheStreet) -- For all of its efforts to remake itself into a viable business that can legitimately attract investors, the airline industry remains inordinately dependent on outside events --- chiefly, for the moment, the price of fuel.
The industry was barely profitable in the first half of the year, with the top 10 carriers reporting a net profit of $1.6 billion, up from $1.2 billion during the same period a year earlier. Net profit margin rose to 2.1% from 1.6%. The group went from "razor-thin to paper-thin margins," said John Heimlich, economist for Airlines for America, the industry trade group.
But "a swing of 20 cents per gallon (in fuel costs) would have wiped out the profits," Heimlich told reporters during a media conference call on Thursday. Threateningly, since the end of the first half, fuel prices have risen by 26 cents.
"The industry is never fully insulated from shocks," Heimlich said. "But it is much better insulated now than it was in 2007. We had the one-two punch of fuel price shock and recession in 2008 (and) the industry talked about shock as a threat to its existence. Now it's a threat to earnings. That is a much better place."Investors are aware of the industry's improvement, which has been based primarily on capacity discipline, achieved partially through consolidation, and the acceptance of ancillary fees. Moreover, airlines led by Alaska (ALK), Delta (DAL) and Southwest (LUV) have aggressively sought Wall Street's approval. In May, Delta said it will restore its dividend and repurchase shares. In July, Alaska declared a dividend, raised fees, squeezed more money of its credit card deal with Bank of America (BAC) and signed a five-year pilot deal. Most airline shares are up significantly this year. Spirit (SAVE) is up 77%; Delta is 70%; Alaska has gained 41%, Southwest is up 29%; US Airways (LCC) up 20% and JetBlue (JBLU) has risen 10%. However, if the Justice Department succeeds in blocking the planned merger of US Airways and American (AAMRQ), the good times could end. "Investor flight is a possibility," wrote JP Morgan analyst Jamie Baker, in a recent report.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV