The high price of oil has disrupted the airline industry's return to profitability, with Wall Street brokerages dropping earnings estimates and warning that more could come. In 2004, the price of oil soared from about $32.50 a barrel to well above $36 a barrel, as demand remained strong and OPEC pushed a plan to limit supply. In response, Morgan Stanley lowered earnings estimates on the entire airline industry on Tuesday morning, while Raymond James dropped estimates for a pair of low-cost carriers. With the average price of oil at $34 a barrel in 2004, Morgan Stanley analyst William Greene ditched an assumption that oil would average $30 a barrel, telling investors that at current levels, none of the network carriers would be profitable for the year. On average, Wall Street analysts currently predict that Continental Airlines ( CAL) and AMR ( AMR), parent of American Airlines, will be profitable. "It should come as little surprise that those airlines with the largest hedged positions will see the most limited earnings impact from oil price changes," said Greene in his note. "If oil averages $34 a barrel, none of the U.S. major network airlines is likely to be profitable, though all of the low-cost airlines should remain in the black."
High Oil, Deeper Losses
Instead of seeing American earn $1 a share in 2004, Greene expects it to lose 70 cents a share. His 2004 loss estimates for Continental, Delta Air Lines ( DAL) and Northwest Airlines ( NWAC) were also cut, falling below current Wall Street expectations. Profits at low-cost carriers, which have done a better job hedging fuel costs, will be hurt, but less so, with Greene dropping estimates for AirTran ( AAI), Frontier ( FRNT), JetBlue ( JBLU) and Southwest ( LUV). Elsewhere, Raymond James dropped earnings estimates for AirTran and JetBlue, assuming oil would stay at $35 a barrel for the first half of the year.