Airlines drop ‘worst’ fliers, profit margins could rise

Delta Air Lines Inc. and Continental Airlines Inc. may return to profit next year, buoyed by a 21-percent drop in jet fuel since its July peak and higher fares that are chasing off the lowest-paying passengers.
American Airlines parent AMR Corp. and United Airlines owner UAL Corp. were among eight carriers raised to “buy” from “neutral” last week by UBS Securities LLC. Delta, Continental and Northwest Airlines Corp. will end losses in 2009, while AMR and UAL will have deficits of $1 a share or less, UBS said.
The improved outlook suggests the full-fare airlines are starting to benefit from plans to park 460 jets and trim 26,000 jobs. They’re also adding revenue from higher prices and fees to pare 2008 industry-wide losses that may reach $10 billion.
“They were scared into making changes that can now generate profits they otherwise wouldn’t have made,” said Michael Derchin, an analyst at FTN Midwest Research Securities Corp. in New York. “They have some cushion now, because of what they’ve done on the cost and capacity side.”
Morgan Stanley analyst William Greene on Sept. 15 boosted his industry outlook to “attractive” from “in-line,” and raised his 2009 earnings estimates for each of the eight biggest U.S. carriers. Greene now projects only AMR to have a loss in 2009.
Record fuel costs and declining asset values sent the five largest full-fare airlines to $5.62 billion in net losses last quarter.
The drop in jet fuel after reaching a record $4.36 a gallon on July 3 is “is significant and results in much better earnings per share than our prior estimates,” UBS analyst Kevin Crissey in New York said last week in a note.
Dwindling domestic traffic at American, United, Delta, Continental and Northwest – the five biggest full-fare airlines in the U.S. – in August shows they are pruning their least-profitable routes and passengers, said Jim Corridore, an equities analyst at Standard & Poor’s in New York.
Continental, the fourth-largest U.S. airline, posted a 6.5-percent revenue increase for each seat flown a mile in August, exceeding the 5-percent estimate of Calyon analyst Ray Neidl. That means the carrier is getting more money for each passenger.
“They’re firing their worst customers” who will not pay higher fares, said Corridore, who raised Continental to “buy” from “hold” earlier this month. “It’s a brilliant move. They shouldn’t be flying those people to begin with.”
Airlines have raised fares 15 times this year, pushing up prices 20 percent to 40 percent in most U.S. markets, according to ticket-research firm FareCompare.com. They have also added fees such as $15 to check the first piece of luggage and charges of $25 or more to redeem frequent-flier points.
U.S. airlines’ outlook is “remarkably better” than in July, when oil touched a record $147 a barrel, Corridore said. Oil as of early last week had given up all its 2008 gains in New York Mercantile Exchange trading.
“I am very bullish on the industry right now,” Corridore said. The Bloomberg U.S. Airlines Index has gained 56 percent since July 3.
Jet-fuel prices have surged 46 percent over the past year, contributing to combined 2008 losses that may reach $10 billion, according to the Air Transport Association trade group.
UBS’ Crissey raised American, United, Delta, Continental, Northwest, US Airways Group Inc., AirTran Holdings Inc. and Allegiant Travel Co. to “buy” from “neutral.” He boosted JetBlue Airways Corp. to “neutral” from “sell.”
Morgan Stanley’s Greene now rates AMR as “equal-weight,” from “under-weight,” and he boosted UAL and Continental to “over-weight” from “equal-weight.”
Southwest Airlines Co., the only big U.S. carrier that is still profitable, has a “currently stretched valuation,” Greene said, cutting his rating to “under-weight” from “over-weight.” &#8226