Airlines Still Reeling From Fuel, Labor Costs - TheStreet

Skyrocketing fuel prices and labor troubles have plagued the airline industry lately, forcing a number of the major carriers to again project quarterly losses -- and leading analysts to forecast several more turbulent financial periods.

Many of the airlines, which are trading below their 52-week highs, were off in afternoon activity Monday.

AMR

(AMR)

, the parent of

American Airlines

and

TWA

, lost 3.9% to $33.03.

Delta Air Lines

(DAL) - Get Report

fell 4.3% to $41.66.

UAL

(UAL) - Get Report

, the holding company for

United Airlines

, shed 1% to $31.90, and

Northwest

(NWAC)

was down 2.5% to $22.80. Those four airlines have taken down their guidance this month, virtually mirroring the previous quarter, in which

Southwest Airlines

(LUV) - Get Report

was one of the few major carriers to avoid a profit warning.

Now add to the mix the possibility of a price war. On Monday, Delta disclosed plans to cut prices on summer and fall fares in a number of markets. The company said customers who buy tickets through its Web site will get up to an additional 20% off. United, Northwest and American Airlines followed suit and said they would match the lower prices.

But just what are the chances of an escalating price war? "It's realistic," said Raymond Neidl, an analyst with

ABN Amro

. "Its going to continue to hurt revenue and profitability going into the third quarter." Neidl, whose firm doesn't have an underwriting relationship with any of the airlines, said he expects the carriers to offer low-cost fares until Labor Day.

Not everyone sees this as the beginning of a big battle, though. Sam Buttrick, an analyst with

UBS Warburg

, said he doesn't quite see a price war developing yet, although the carriers have taken more initiatives to attract customers this year than last. "Fare levels are comparable to recent sales initiatives." Furthermore, he said it's "unlikely corporate demand will improve significantly until next year. Therefore the airlines will continue to try to generate revenue."

Buttrick said that if an industry recovery is defined by year-over-year comparisons, then the airlines should start to rebound in the fourth quarter of this year. However, "if you mean good results again like the record profits of the 1998-99 time frame, it will take several years of rebuilding. We see a lot of red ink this year and we're currently projecting the industry will lose in excess of $500 million this year."

Last week, the

Air Transport Association of America

, a trade group, said that, on average, revenue passenger miles declined 1.8% percent in May. Domestic revenue passenger miles fell 2.5%, while international totals were unchanged. One revenue passenger mile is one fare-paying passenger transported one mile.

"We think the rest of the year is going to be pretty ugly," said James Higgins, an analyst with

Credit Suisse First Boston

. He said domestic revenue may be approaching a bottom, but now the international business is starting to show cracks. "Just as we're seeing domestic revenue start to bottom, international is going to throw its hat into the revenue ring."

And, he said, the near-term outlook for the industry isn't good. "We see several more quarters of softness," Higgins said. "Business travel has slowed, and we don't see it coming back overnight. I think going into the first quarter of next year things are looking pretty soft." However, he said he expects things to rebound in the second quarter of next year as year-earlier comparisons become easier.

Last week, AMR projected a loss of more than $100 million for the second quarter. The company attributed the outlook to high fuel prices and the continued effects of a sluggish U.S. economy. "We don't foresee a near-term recovery in demand, so we expect the balance of the year to be very challenging," the company said in a statement.

Then, Northwest, also citing fuel costs and weakness in the economy, said it expects a loss of $50 million to $75 million in the second quarter. United Airlines said revenue and earnings for the current quarter would be below year-ago totals, and Delta also forecast losses for the period.

Higgins said he doesn't see anything in the near term that would lead the shares of the airline companies higher. However, he said stock prices are low enough that longer-term investors might find a reason to buy.

And, while acknowledging the industry's woes, he said his firm recommends investors accumulate the stocks, but "we're not pounding the table."