Overseas Air Travel Dropping

As the major U.S. airlines prepart to report earnings starting this week, it's amid a drop-off in international travel.
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CHARLOTTE, N.C. -- As U.S. airlines prepare to report fourth-quarter earnings, new statistics show that international traffic is tumbling.

In November, premium traffic slumped by 11.5%, following a 6.9% drop in October, according to the International Air Traffic Association. The declines totaled 17.7% across the Pacific and 9% across the Atlantic, the trade group said Monday. Meanwhile, international economy travel slumped by 6% in November, following a 1.8% drop in October.

American parent






will report Wednesday, leading off for the U.S. carriers.


(LUV) - Get Report

will report Thursday. Remaining airlines report next week. Legacy carriers devote, on average, about 40% of capacity to international routes, although

US Airways


is around 20%.

Analysts surveyed by Thomson Financial expect AMR to lose 77 cents a share in the fourth quarter, with revenue down 3% to $5.5 billion. They expect United to lose $4.42 a share, with revenue down by 10% to $4.5 billion.

The decline in international travel could impact both carriers. Until the merger between


(DAL) - Get Report

and Northwest, United was the leading carrier across the Pacific. American leads between New York and London's Heathrow Airport, a premium market that has been heavily impacted by the decline in investment banking traffic.

A second fourth-quarter negative will be fuel-hedging losses, a result of the rapid decline in fuel prices. However, the losses should end early this year, assuming prices do not rise again. United CEO Glenn Tilton said recently that United's fuel cost could fall by $2.5 billion this year.

Last week, Standard & Poor's analyst Jim Corridore reiterated holds on American and United. Despite giving both airlines the same rating, however, he raised full-year estimates on American and cut them on United.

Regarding American, Corridore said: "We expect falling demand domestically and internationally will partly offset the fuel cost benefit, but see the drop in oil prices as the more important lever on '09 results." He raised his 12-month-target price to $13 from $9. American was trading Tuesday at $10.55, down 85 cents.

On United, Corridore said results will be "pressured by fuel hedging losses." The carrier will benefit from falling fuel costs, he said, but "the severity of the economic slowdown and of UAUA's overexposure to some poorly performing markets warrant caution." His target price is $12, down from $15. United traded Tuesday at $12, up 5 cents.

Meanwhile, Avondale Partners analyst Bob McAdoo recommends all five legacy carriers, particularly Delta. "Given current airline share prices, it would appear that investors are overly concerned with recession-drivendeclines in demand," he wrote, in a recent report. "Investors do not seem to fully appreciate that the benefits of capacity cuts and lower oil prices are reportedly more than offsetting any recession-driven revenue weakness."

McAdoo said most legacy carriers currently trade between two and three times his full-year estimates, even though they traded between six and seven times earnings from 1996 through 2000, the last time they were consistently profitable. "With that in mind, we expect near record 2009 earnings to cause these shares to potentially double or triple in 2009," McAdoo said.