Airlines Still Live on the Edge, With First-Half Profit Margins of Just 2%

CHARLOTTE, N.C. ( TheStreet) -- For all of its efforts to remake itself into a viable business that can legitimately attract investors, the airline industry remains inordinately dependent on outside events --- chiefly, for the moment, the price of fuel.

The industry was barely profitable in the first half of the year, with the top 10 carriers reporting a net profit of $1.6 billion, up from $1.2 billion during the same period a year earlier. Net profit margin rose to 2.1% from 1.6%. The group went from "razor-thin to paper-thin margins," said John Heimlich, economist for Airlines for America, the industry trade group.

But "a swing of 20 cents per gallon (in fuel costs) would have wiped out the profits," Heimlich told reporters during a media conference call on Thursday. Threateningly, since the end of the first half, fuel prices have risen by 26 cents.

"The industry is never fully insulated from shocks," Heimlich said. "But it is much better insulated now than it was in 2007. We had the one-two punch of fuel price shock and recession in 2008 (and) the industry talked about shock as a threat to its existence. Now it's a threat to earnings. That is a much better place."

Investors are aware of the industry's improvement, which has been based primarily on capacity discipline, achieved partially through consolidation, and the acceptance of ancillary fees. Moreover, airlines led by Alaska ( ALK), Delta ( DAL) and Southwest ( LUV) have aggressively sought Wall Street's approval. In May, Delta said it will restore its dividend and repurchase shares. In July, Alaska declared a dividend, raised fees, squeezed more money of its credit card deal with Bank of America ( BAC) and signed a five-year pilot deal.

Most airline shares are up significantly this year. Spirit ( SAVE) is up 77%; Delta is 70%; Alaska has gained 41%, Southwest is up 29%; US Airways ( LCC) up 20% and JetBlue ( JBLU) has risen 10%.

However, if the Justice Department succeeds in blocking the planned merger of US Airways and American ( AAMRQ), the good times could end. "Investor flight is a possibility," wrote JP Morgan analyst Jamie Baker, in a recent report.

"Part of what's been 'different this time' for the industry has been increasing interest from less traditional, long-only investors that had previously shunned the space," Baker said. "A significant part of the sector's appeal was the notion of 90% of domestic capacity being controlled by four players. With that scenario now potentially at risk, we believe the broader industry thesis has been compromised."

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

>To contact the writer of this article, click here: Ted Reed

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