Airline Industry 2009 Recovery – MAYBE – (AMR)(UAL)(DAL)(CAL)(SWA)(LCC)(JBLU)

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Airline Industry 2009 Recovery – MAYBE –

By Robert Herbst

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 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.

The link below 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.

Link to revenue cost interactive charts  from AirlineFinancials.com.

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Robert Herbst has been a commercial pilot since 1969. His aviation experience and

financial background provides a unique analytical perspective into the airline industry.

His website: Airlinefinancials.com provides airline industry analysis and commentary

for major US carriers.