Warmer weather and the approach of summer are doing what they're supposed to do for the airlines: heating up passenger traffic, revenue and share prices.
But recent good news, and expectations for busy summer travel, won't give the industry a vacation from the high fuel costs and tough competition that are expected to cause hefty losses for the full year.
"The real problem in the short term is that we've still got fuel costs hurting the industry in general," says Helane Becker, airline analyst at the Benchmark Co., a New York-based brokerage that does no business with the companies it covers. "Until we get some fuel-cost relief or the ability to raise fares further, we don't see anything changing."
What's more, Becker and some other analysts contend that airline share prices already account for recent positive developments. The Amex Airline Index has gained 18% since hitting a trough on May 13.
Last week, Ray Neidl, Becker's counterpart at Calyon Securities, reminded investors not to get carried away after the first leg of that rally. Noting that the industry is still on track to lose more than $5 billion this year, he characterized the sector as "fairly priced" heading into the summer. Calyon does and seeks to do business with companies its analysts cover.
Nevertheless, there are still plenty of buy opinions on individual airline stocks from other analysts. For example, Merrill Lynch's Michael Linenberg has buy ratings on several major carriers and recently raised his price target on
to $18 on expectations of better revenue. Merrill does and seeks to do business with companies covered in its research reports.
Fuel Factors Remain
Certainly, recent trends have been encouraging, especially for an industry that has been battered by recession, the Sept. 11, 2001, terrorist attacks, the Iraq war, the SARS crisis, the growth of discount carriers and high oil prices.
Marking a change from 2004, when individual carriers' attempts at fare hikes largely failed, most major carriers have joined in on seven rounds of fare increases since late February. The increases, typically of $5 to $10 one-way, have not been across the board, because network carriers often don't institute them on routes where competition is intense or where discount carriers have failed to participate.
Still, they're significant and have cumulatively raised average leisure fares $40 to $45, estimates Terry Trippler, the in-house airline expert at the travel company 1-800-CheapSeats, a unit of RCG Companies.
The good news of the fare hikes must be put in perspective, though, because crude oil prices are only a few dollars below their record high of around $58 in early April. Becker estimates that the fare increases have increased industry revenue by $500 million so far this year, while fuel has cost it $2 billion more than last year.
The latest attempt at boosting prices fell apart last weekend when AMR's
pulled the plug after failing to get broad participation from low-cost competitors.
Pundits say the failure of the latest attempt doesn't preclude further hikes, because airlines realize they need to continue boosting revenue in the face of high oil prices, and because surging spring and summer traffic will likely allow them to lift fares again without hurting demand.
The latest round of monthly statistics revealed double-digit percentage gains in passenger traffic at
Delta Air Lines
and Northwest all saw traffic rise at least 6.0%.
The growth in traffic, along with the recent fare increases, appears to be paying off. Continental, which is unique among non-bankrupt major carriers in releasing monthly unit revenue, credited the surge in traffic and the string of fare increases with boosting its mainline unit revenue by 9% to 10% last month, much more than analysts expected.
The report prompted more analysts to join the ranks of those predicting Continental will turn a second-quarter profit. And analysts surveyed by Thomson First Call expect the carrier to earn 33 cents a share during the summer vacation-laden third quarter.
Still, even a two-quarter breakout into the black won't save Continental from logging full-year losses of $4.30 a share, according to the consensus estimate. The carrier lost $2.77 a share in the first quarter, and like other airlines it faces the normal seasonal slowdown in the fourth quarter.
Analysts will closely watch what happens to airfares through the rest of the summer and into the fall. Becker says fares still have room to rise until mid-July. As fall approaches, they'll decline, though, as fewer people will be interested in making advance purchases for September, which is typically a slow month. Leisure travel tends to drop off in September, while fall business travel has yet to pick up.
Trippler says there will undoubtedly be fare sales as airlines try to fill seats right after Labor Day, which typically marks the end of the summer travel season. But he's more optimistic that fares won't dip so much in September and October. He reasons that older couples whose children have left the nest tend to travel then, and their ranks have increased with the aging of the baby boomers. Trippler owns no airline stocks.
Even if fares stay strong, it may not be enough to give relief to the legacy network carriers who are trying to avoid cash crunches amid the high oil prices. Analysts view Northwest and Delta as most at risk, but some believe Continental still faces liquidity challenges even after it rounded up $300 million in new financing last week by securing its Pacific routes.
Northwest is trying to slash labor costs to preserve its cash cushion. Delta has repeatedly warned that it faces liquidity hurdles this year because of the surge in oil prices. Raising the specter of bankruptcy, chief executives from both companies this week urged lawmakers to reform federal pension rules and give airlines with traditional pension plans more time to meet obligations.
"The traffic, and perhaps more importantly, the pricing increases we've seen recently are certainly welcome," says Philip Baggaley, senior airline credit analyst at Standard & Poor's. (Baggaley is prohibited from owning shares or bonds of companies he follows.) "But the underlying problems of low-cost competition, high fuel prices and substantial liabilities -- both debt and pensions -- are still a significant risk."