'Profitable Recession' May Await Airlines

Earnings worldwide should grow next year, an industry group says.
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Early projections indicate that 2008 will probably be a difficult, but still profitable, year for the airline industry.

Worldwide, carriers are expected to post a net profit of $7.8 billion next year, according to a new report by the International Air Transport Association, a group that represents 240 airlines.

Still, "the continuing high price of oil combined with turmoil in the credit markets is a cause for concern in 2008," said Giovanni Bisignani, the CEO of the IATA, in a prepared statement. The group reduced its June forecast, which called for a $9.6 billion profit.

Even so, the new projection is well ahead of the expected $5.6 billion profit for 2007, says IATA. Previously, the group had predicted $5.1 billion in profits for this year, but it raised its estimate because high travel demand is offsetting rising oil prices. IATA believes crude will average $67 a barrel this year, up from its prior view of $63.

Meanwhile, JPMorgan analyst Jamie Baker suggests a "profitable recession" for U.S. carriers in 2008. As a group, the domestic airlines are far stronger than they were entering the 2001 recession, he said.

"Holding fuel and

capacity constant, a $1.4 billion 2008 profit could be expected this time," Baker wrote in a report. More likely, he said, legacy carriers would shed capacity and fuel prices would decline modestly, further boosting profits.

Airline stocks could benefit, he said, because fears of a slowdown are already built in to prices. The Amex Airline Index was trading Tuesday at 44.61 and is down nearly 25% this year after ending 2006 at 58.29.

Baker said his three favorite airline stocks are

Delta

(DAL) - Get Report

,

US Airways

(LCC)

and

Northwest

(NWA)

.

JPMorgan has financial relationships with all three, including having acted as a manager in recent public offerings by Delta and Northwest, and beneficial ownership of 1% or more of a class of stock in Northwest and US Airways.

Meanwhile, IATA said its profit expectations are highest for North American carriers, which have had slower capacity growth than airlines in other regions. Since 2001, IATA said, Asia-Pacific carriers have expanded capacity by 42%, European airlines have added 29% and North American companies have added 11%.