Hurricane Sandy's Impact On Airline Profits: Overblown

Includes: AAL, DAL, HA, JBLU, UAL
by: Adam Levine-Weinberg

With Hurricane Sandy shutting down much of the Northeast this week, many investors are doubtless wondering what impact the storm will have on airline profits. After all, the number of flight cancellations has grown rapidly. As of Wednesday afternoon, roughly 20,000 flights had been canceled due to the storm. Flight cancellations mean lost revenue, and lost revenue usually means lower profits.

It's not quite that simple in the airline industry, though. Storms do tend to hurt airline profits, as the airlines are required to provide refunds to customers who decide not to travel because their flights are canceled. However, many other customers are rebooked on flights through other airports or on other days. Meanwhile, airlines save a significant amount of money (particularly on jet fuel and landing fees) when running fewer flights. The cost savings typically offset a large proportion of the revenue losses, though not 100% of those losses.

Thus, when I saw an article entitled "Sandy Could Cost Airlines $450 Million", I was highly skeptical. An un-named analyst told CNBC that the airlines lost $300 million due to Hurricane Irene last August, and that the losses from this storm could be one and a half times larger. A similar figure was floated to Reuters by transportation consultant George Hamlin: Hamlin claimed that losses to the airlines could total "hundreds of millions of dollars". It would have been useful if CNBC or Reuters (or the analysts they spoke to) had cited hard data to support their estimates, because historical examples and seasonal factors suggest a much lower loss figure.

For one thing, the $300 million estimate for Irene-related losses seems hard to sustain. Delta Air Lines (NYSE:DAL), the second largest U.S. carrier, stated that Hurricane Irene reduced profit by roughly $15 million. JetBlue (NASDAQ:JBLU), which has operations heavily concentrated at New York's JFK International Airport and Boston's Logan International Airport, reported only an $8 million loss due to Irene. US Airways (LCC), which is also a major player in the Northeast, reported an $8-$10 million reduction in Q3 profit due to the hurricane. United Continental (NYSE:UAL) did not provide a specific figure for losses, but said that the hurricane reduced revenue by $40 million while increasing PRASM by 1%. Losses (net of lower expenses) probably were similar to Delta's at $15-$20 million. Thus, combined losses due to Hurricane Irene at four of the most-affected air carriers were approximately $50 million. Since these four airlines represented the vast majority of cancellations during Hurricane Irene, it would appear that $100 million is a safe upper limit to the lost profits from that storm.

As for Hurricane Sandy, the number of cancellations has already passed the total from Hurricane Irene, which was 13,416. On the flip side, while Irene occurred in August (a very busy travel period), Sandy is occurring during October, one of the weakest months for air travel. This means that planes are less full, and yields (revenue per passenger) are lower. This mitigates the loss of revenue due to cancellations, and will also make it easier for airlines to find space on flights later this week to rebook passengers.

Airline consultant Michael Boyd recently forecast the loss to airlines around $100 million. This figure seems more plausible than CNBC's or Reuters' dire estimates. Considering that this will be spread amongst a number of different carriers, the effect on Q4 profits will be similar in scale to last year's Hurricane Irene, i.e. minimal. Carriers may even benefit if the reduction in oil demand due to the hurricane leads to lower jet fuel prices.

On Wednesday, most airline stocks closed the day near the flat line or even showed gains. The market thus seems to agree (at least initially) that Hurricane Sandy will have a minor impact on airline profits. We will probably learn more in the next few days, as airlines begin to release their October traffic and revenue results. For the moment, though, most airline shares remain a good value. My top two picks in the sector are Hawaiian Airlines (NASDAQ:HA) and Delta.

Disclosure: I am long DAL, HA, UAL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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