So what if airline revenue will likely decline at an unprecedented rate of 8% to 12% next year? That doesn't mean airlines can't make money.
, now the largest airline in the world, said Tuesday it will be "solidly profitable" next year, thanks to a wide range of industry and carrier-specific trends, some obvious and some less so.
That outlook led Delta CEO Richard Anderson to pitch investors to consider the airline industry, a longtime dog that has lost about $9 billion since the Wright Brothers first flew. "Look out into 2009, for the first time, this investment is a lot better than a lot of investments in a lot of other industries," Anderson said near the conclusion of the airline's investor conference.
Meanwhile, in a report issued Tuesday, UBS Securities airlines analyst Kevin Crissey raised estimates for most carriers. "The sector has moved nicely higher over the last few weeks but many stocks still look cheap to us," he wrote. "We expect Q1 will be bad due to losses on fuel hedges and weak demand, but future quarters should be much better as the hedges roll off."
Crissey rated Delta his top pick and boosted his estimate on
by 160% to $2.95 a share. UBS has financial relationships with both carriers involving both investment banking and non-investment banking services.
It's not just oil prices below $44 a barrel that led Delta President Ed Bastian to assert "we expect to be solidly profitable in 2009," although he estimates Delta will save $5 billion next year if fuel prices average $50.
More benefits result from an agreement, unveiled Tuesday, between Delta and
, who now boast an affinity card program with 74 million members. The deal provides Delta will an immediate $1 billion liquidity boost in exchange for a purchase of frequent flier miles, as well as another $1 billion from contract improvements through 2010.
The merger with Northwest is going so smoothly, said Anderson, that: "Eighteen months from now, it will be acclaimed as the most effective and smooth merger in the industry."
Not to say he was speaking early, but on Monday, the International Association of Machinists sued the carrier, arguing that it cannot begin seniority integration for union members before union representation elections occur. The Association of Flight Attendants filed a similar suit last month. Both represent thousands of workers at Northwest, and want elections at Delta, where potential members are unrepresented.
On the pilot side, however, progress has been smooth. On Monday, an arbitrator's decision created an integrated pilot seniority list -- reflecting a sharp contrast to the 2005 merger of
and America West, whose pilots continue to wrangle.
"We have competitors that can't sit in the same room with their pilots, and we did three collective bargaining agreements in 2008," CEO Richard Anderson said Tuesday, evidently referring to a failed negotiating session last week, when American pilots walked out on company representatives.
Among other, less obvious trends that benefit Delta and the industry, one is "the capital market is largely closed to new aircraft financing (by) a start-up carrier," Bastian said. Often, in previous downturns, capacity has increased as startups enter the business.
Another plus: The merger brought Delta some old airplanes, particularly DC-9s. Seen as a liability when fuel costs were high, they have the advantage of being paid for and fully depreciated. That makes them so cheap to operate, said Chief Operating Officer Steve Gorman, that Delta can carry more spare airplanes -- boosting operational efficiency.
"Yesterday's trash is tomorrow's treasure," said Executive Vice President Glen Hauenstein, noting, "This fleet allows an incredible amount of flexibility."
Bastian conceded the environment is tough. "Our demand started to slow in October," he said. "We started to see a downtick in bookings, as the world started to put spending on pause. Spending has slowed down over the course of the fourth quarter."
Delta expects industry revenue to decline at a rate exceeded only in the immediate aftermath of the Sept. 11 attacks, which produced a 17% decline, Bastian said. However, by the end of 2009, the airline industry will have reduced domestic capacity by 14%, while the decrease at Delta will be 20%, he said.