Airline Stocks Still Buys With $100 Oil: Analyst

CHICAGO ( TheStreet) -- Worried that rising fuel prices will reduce airline profits?

Don't be, said two airline analysts in recent reports. "High Oil Prices Are Good for Airlines," is the headline on a report by Stifel Nicolaus analyst Hunter Keay, while Soleil Securities analyst James Higgins titles his report: "Analyzing Higher Fuel Price Impact: Less Than We Expected."

Keay writes that capacity cuts since 2008 have resulted in "a comprehensive restructuring of the industry that should contribute to accelerating earnings growth into next year, even with expensive jet fuel." Domestic capacity has fallen 8% since 2006 and has fallen back to levels last seen in 2003 and 1999, he said, noting that 2011 domestic capacity growth is unlikely to exceed 1%.
United Airlines

Many investors are ignoring trends including capacity discipline, the advent of fees, widespread hedging, reduced leverage for labor, the potential for more mergers and the low likelihood of startups, Keay wrote, noting that United ( UAL) is his favorite airline stock.

Higgins, meanwhile, said that while higher fuel prices represent "the single greatest threat to the outlook for airline stocks ... most carriers would still make money in 2011 in a $100 oil environment." He said Alaska ( ALK) is least affected by higher fuel prices, due to strong hedging positions and industry-high margins.

Higgins' other favorites are Delta ( DAL) and United. Higher fuel costs could result in American ( AMR) losing more money and in US Airways ( LCC) and AirTran ( AAI) swinging to losses, he said.

As for fuel hedging, Keay said Delta has the most advantageous position, with 39% of 2011 hedged at $85 a barrel. Delta recently provided 2011 fuel cost guidance of $2.47 a gallon, less than Southwest ( LUV) guidance of $2.70 to $2.75 a gallon. In general, he said, airlines including Southwest have limited hedging positions, meaning that fuel cost increases are more likely to be passed on to consumers.

Regarding fee income, Keay noted that fees will account for the total amount of US Airways 2010 net income, which he estimates at $486 million, just one indication that fee income is likely to reduce historic earnings volatility.

Keay also noted that that 2010 growth in passenger revenue per available seat mile will equal about 13% and will outpace capacity growth (as measured by available seat miles) by about 1,000 basis points, the biggest gap between revenue growth and capacity growth since 1981.

-- Written by Ted Reed in Charlotte, N.C.

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