Airline Industry: 2009 Recovery?

Only weeks ago, due to the unprecedented rise in fuel costs, analysts were predicting doom for the airline industry.

Today, crude oil is over 60% less than it was just over three months ago and the price of jet fuel is about what it was in early 2007. In anticipation of lower demand, every major airline reduced capacity starting with the current Q4 2008. (See note at end regarding jet fuel pricing).

Those same analysts who were predicting airline failures are now projecting billions of dollars in profits for 2009.

As they say- “things change”!

If jet fuel remains at or below today’s price, Q4 bottom line expense will be further reduced by 4-5% from current projections.

Profits more or less require the correct balance between capacity, pricing and costs.

After reviewing recent traffic reports and capacity guidance, it is easy to make an argument there is still 10-15% excess capacity which will encourage fare sales and lower overall yields into 2009.

Based on estimated earnings for year 2008, the largest 8 airlines are projected to lose over $5.3 billion (does not include a few $billion more in non-cash write-downs).In spite of creative ala carte fees for everything from fuel surcharges to a blanket, 2008 revenue was not enough to cover the real costs of airline operations. Southwest’s fuel hedges were the only reason they had a profit.

Assuming October traffic demand carries forward through this year and start of 2009, the 4^th quarter revenue/cost projections do not indicate a profit until traffic increases or/and fuel cost projections are reduced.

As we move through Q1 2009, there should be a more predictable view of the impact depressed Global economics will have on traffic demand.

Note: Jet fuel has a price premium above crude oil known as the crack spread. Recent jet fuel price has been 8-10% higher than the last time crude oil was $55-60 per barrel.

This link will provide access to an interactive worksheet that allows the user to make multiple changes to each airlines financial and operational metrics. Numerous projections, including net earnings are automatically calculated with each change.

Disclosure: no positions

Comments

[UAflyer:]

Q12009 should be interesting indeed, because if businesses fulfill their survey answers and cut substantially on business travel, the impact will be profound. Clearly there will be very little consumer travel for Q42008 not just seasonally, but smarting from Fuel surcharges that are clearly semi-permanent along with checked bags and the menu of fees. Carriers seem to be focused on cutting capacity (re-inventing their business), than wooing customers back on the plane.

Of the earning summaries I have read in the last month, airlines had write-downs for fuel hedges. Possibly pegging Jet fuel prices at $80-90 for many air carriers through the end of 2008. Lets hope many are not still in this situation.

The cost of Oil is a huge factor, but having passengers helps a lot too :)

2008 Nov 16 08:21 AM