During intra-day trading on Thursday, the American Stock Exchange Airline Index had posted considerable gains of nearly 2.5% as Jamie Baker from J.P. Morgan raised his profit estimates for the industry as a whole, and noted that the airlines are able to handle spreads in the price of much better than there were in the past since the size of the industry is much smaller. The key factor behind the positive outlook was the recent reduction in Gulf Coast spot prices, which have fallen nearly 12% since their February highs. The price per gallon has fallen from $3.30/gallon all the way to $2.88/gallon.
Mr. Baker estimates that the price drop will equate into almost $5.5 billion in annual savings, and most analysts haven't considered those numbers in their estimates. His estimates, which remain at the higher end for both 2012 and 2013, include four of the major carriers and two of the major discount carriers. He is currently at the high-end of the average annual estimates for Delta (NYSE:DAL) which is expected to earn $2.27/share for 2012, and US Airways (LCC) which is expected to earn $2.29/share for 2012. In terms of the major discount carriers, he is currently at the higher end of Southwest Airlines (NYSE:LUV) which is expected to earn $0.70/share, and at the higher end of JetBlue (NASDAQ:JBLU) which is expected to earn $0.52/share.
Delta Airlines - For the second quarter analysts are expecting DAL to earn $0.81/share on revenue of $9.65 billion dollars and for the year they are expected to earn $2.27/share on revenue of $36.93 billion. One of the key things for Delta is the fact it was way ahead of the game on establishing a proactive strategy to reduce fuel costs. It went ahead and purchased a refinery from ConocoPhillips (NYSE:COP) for $150 million which would save the company a significant amount of money on fuel costs and enhance the company's bottom line beginning in the third quarter of this year. If Delta can continue to reduce the cost of capital spending on such things as fuel, then earnings estimates could be easily surpassed in the second and third quarters of this year.
US Airways - For the second quarter analysts are expecting LCC to earn $1.30/share on revenue of $3.73 billion and for the year they are expected to earn $2.29/share on revenue of $13.95 billion. Investors should note the stock was trading higher not only on the news of lower fuel costs but on the notion of possible merger talks with AMR Corp (AAMRQ.PK). AMR noted it was going outside the pre-established committee to find a possible suitor to be acquired and mentioned LCC as a potential target. If US Airways can continue to reduce capital spending in the way of fuel and gain a significant percentage of market share if the AMR acquisition were to happen there's no reason why LCC can't be trading in the $15/share to $17.50/share level. The company has beaten EPS estimates over the last four quarters by an average of $0.0725/share and looks to continue that streak when they report second quarter numbers.
Southwest Airlines - For the second quarter analysts are expecting LUV to earn $0.28/share on revenue of $4.54 billion and for the year they are expected to earn $0.70/share on revenue of $17.37 billion. Not only has the news of reduced fuel costs enlightened investors, but the fact the company will begin to offer international flights has been received with open arms. Both factors will play a key role in the company's earnings moving forward and if profits can be generated from both international flights reduced fuel costs, LUV could beat annual estimates by $0.03/share to $0.11/share on revenue between $17.41 billion and $17.6 billion.
JetBlue - For the second quarter analysts are expecting JBLU to earn $0.16/share on revenues of $1.29 billion and for the year they are expected to earn $0.52/share on revenue of $5.08 billion. These numbers could be easily surpassed, if JetBlue can find a way to reduce its fuel costs, and begin to add more reduced fare destinations. If that happens, and it very well could considering the company's recent partnership with international carrier Turkish Airlines, I can see the stock trading between $7/share and $9.25/share. If JetBlue can't find a way to reduce fuel spending then the stock would most likely remain at these levels or even lower for some time.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.