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Airlines Should See Profits

AMR kicks things off Wednesday.
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Expectations for the airline industry's first-quarter results are high, despite the negative impact of bad weather.

Quarterly earnings reports will begin Wednesday with

AMR

(AMR)

, the parent of American Airlines.

Last week, Standard & Poor's revised its ratings outlook for the world's biggest airline to positive from stable. The change "reflects ongoing earnings, cash flow and balance sheet improvements that, if sustained, could support an upgrade over the next year," wrote analyst Philip Baggaley in a report.

US Airways

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(LCC)

, which will report on April 26, has said it expects to post a slight profit, excluding special items. The carrier weathered two major ice storms as well as self-inflicted problems due to a reservations system integration in recent weeks.

"From an operational standpoint, we are happy to have the first quarter of 2007 behind us," President Scott Kirby said in a prepared statement.

The industry, defined as the eight largest U.S. carriers, "is set to eke out a small profit, $78 million to be exact, this quarter," wrote Merrill Lynch analyst Mike Linenberg, in a recent report. "This marks the first profitable March quarter since 2000." The quarter is typically slow due to seasonally reduced demand.

Linenberg said most carriers generated positive cash flow from operations not only in March, but also in February, typically a month of losses. Despite rising fuel costs, Linenberg said he expects the industry to report a $5.4 billion pretax profit in 2007.

Taking a longer-term view, JPMorgan analyst Jamie Baker said last week that while the outlook remains positive into next year, he is reducing 2007 and 2008 estimates for several carriers due to anticipated higher costs for fuel and labor. Labor costs could rise by $5 billion by the end of the decade, he said.

Baker reduced his US Airways share price target to $70, eschewing the $100 target he set last spring. Nevertheless, Baker said that US Airways remains "a bargain." Shares traded Monday at $45.53.

JPMorgan has an investment-banking relationship with the carrier.