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Airlines' Recovery Up in the Air

Things should improve for the airline industry in 2005, but that's not saying much, given the disaster that was 2004.

Going into the year, observers predicted the industry would return to profitability. Major carriers had instituted cost-cutting measures, and industry capacity had fallen off somewhat. Airlines would ride a wave of increased passenger demand from the economic recovery, the thinking went.

"But capacity crept back up this year 2004 , and oil prices shot up over 30%, and for some airlines, over 50%," said Jim Corridore, equity analyst at Standard & Poor's. "The combination of those two made it difficult for carriers as a whole."

Oil's rise meant that jet fuel went from an average of about 15% of airline expenses in 2003 to around 17% or 18% in 2004, according to S&P. Most carriers paid dearly for that. American Airlines' parent AMR (AMR) has said that each 1-cent rise in the price of a gallon of jet fuel costs it more than $30 million a year.

Individual carriers' attempts to pass on costs to passengers in the form of higher fares, however, failed in the face of tough competition made tougher by the growing market heft of low-cost carriers. Even though passenger demand did increase, the glut of capacity put downward pressure on unit revenue. The top 10 U.S. carriers likely will lose $5 billion for all of 2004, according to S&P.

All of this has been tough on airline investors. As 2004 drew to a close, the Amex Airline Index was down 2.2%, vs. a 9.1% rise in the S&P 500 and a 3.8% gain in the Dow Jones Industrial Average (see charts).

But the Amex Airline Index doesn't reflect the full magnitude of the sector's carnage, because it doesn't include all the publicly traded U.S. airlines, notably the three worst performers (see chart). They are ATA Holdings (ATAHQ.PK), a low-cost carrier that filed for Chapter 11 bankruptcy protection in October and was down 86% recently; FLYi (FLYI), whose attempt to morph from regional carrier to low-cost airline in 2004 was ill-timed and whose shares have plummeted 81.7%; and US Airways (UAIRQ.OB), which in September filed for Chapter 11 for a second time in two years and saw its stock fall 79.4%.

A Very Tough Year
Best-performing airlines in 2004
Company/Index Ticker 12/28/04 Close Change
Alaska Air Group ALK $32.27 18.20%
Skywest Inc. SKYW $20.19 11.70%
Southwest Airlines LUV $15.88 -1.60%
Amex Airline Index XAL 59.99 -2.20%
Source: TSC Research

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