Airline Roulette: Industry Leader Sees More Failures (AMR)(DAL)

The head of the International Air Transport Association thinks that the plight of the airline industry will get worse before its gets better. He believes that losses among carriers could hit over $6 billion this year.

Oil prices have not come down enough to make fuel "affordable" to the point of curbing losses. Passenger traffic is falling even in formerly strong markets like Asia.

According to The Wall Street Journal, "We are bracing for more situations of airlines collapsing" amid higher fuel prices and lower revenue, warned IATA Chief Executive and Managing Director Giovanni Bisignani. The new concern here is that consumer travel habits will no longer make up for jet fuel pricing.

If his eminence is correct, the recent rally in US airline stocks is premature. Suckers are pouring their cash into airline stocks hoping that falling oil will save the industry. But, oil’s move from $143 to $115 still does not bring jet fuel down to a level which allows operations like AMR (AMR) and Delta (DAL) to get back in the black. If these companies lose meaningful amounts of revenue, they have run through most of the cost cutting that was to help them get by in a hard year.

Airline stocks have rallied off of their bottom, although they are still down about 60% from their 52-week highs. AMR is up 50% in a month.

If there is another $6 billion of losses hiding in the industry, airline stocks may be back to their lows before the end of the quarter. The capital bases at most carriers cannot handle another big hit on their bottom lines.

Douglas A. McIntyre