High Oil Prices Ground Airline Recovery

"The key variables are yields and fuel, and it doesn't appear capacity is going to come out fast enough to make this industry viable," said Vaughn Cordle, chief analyst at Airlineforecasts LLC and a senior 777 captain at United Airlines. He noted that US Airways (UAIRQ Quote), which is in Chapter 11 bankruptcy protection and had been struggling to avoid liquidation, gained more breathing room last month when the Federal Air Transportation Stabilization Board extended the airline's use of cash under a federally guaranteed loan. That put off the capacity reduction that could have resulted from a potential liquidation.

Cordle said Wall Street analysts may be using overly optimistic crude oil forecasts. He says Wall Street consensus forecasts for airline losses imply an average cost for a barrel of crude of $39 this year and $35 next year, even though futures contracts suggest much higher crude prices of $48 and $43, respectively, for those periods.

Changing the fuel variable has a big impact on estimates. Cordle estimates that if fuel were to average $45 a barrel this year, the net loss at 13 of the biggest U.S. airlines would total $5.08 billion, assuming carriers' current cost structures. If fuel were to average $48 a barrel instead, the total net loss would swell an additional $778 million. Cordle notes that both those forecasts are higher than the $3.52 billion tally of Thomson First Call estimates for the 13 airlines.

The chief economist at the Air Transport Association, an industry trade group, is offering a preliminary forecast for industry losses of $5 billion in 2005, according to a spokesman.

Airlines may have expected bigger declines as recently as late last year. In a November regulatory filing, Delta said its business plan is based on crude oil returning to an average of $40 a barrel this year and $35 a barrel next year. (So far this year, oil has settled as low as $45 a barrel.) If oil were to average $50 a barrel, Delta said, its liquidity needs would increase by $600 million this year and $900 million in 2006.