Airlines embrace oil decline, but no time to party
A 23 percent drop in oil prices since mid-July brightens the outlook for troubled airlines, but clouds remain thick over the industry, with little hope that carriers will scale back downsizing plans or repeal unpopular fees.
The U.S. airline industry has fallen on hard times, as rising fuel prices have far outpaced a series of fare hikes that began in 2006. Economic weakness, meanwhile, threatens to erode demand and rob carriers of the pricing power they reclaimed in the wake of a low-fare war with newer, leaner airlines.
But carriers are fighting back with massive reductions in capacity and staff. And some of the gloomy talk from airline experts has turned positive in the last month since crude oil retreated from a record high just above $147 a barrel to a three-month low of $112.87 on Tuesday.
“This represents both the most rapid and most significant expense savings ever realized for the airlines, standing well in excess of any historic precedent for demand weakness,” JP Morgan analyst Jamie Baker said in a research note this week.
The brokerage said the fall of $1 per gallon of jet fuel leads to $13 billon of reduced annualized expense paydayloans. JP Morgan issued a revision of its ratings on 12 North American airline stocks.
Based on a $3.30 per gallon price of jet fuel reached this week, JP Morgan believes the airline industry can be profitable in 2009, after racking up big losses in the first half of 2008.
“The industry today is a significantly different one than that which gave us pause last March, both in our equity and credit views,” the brokerage said.
Share prices of AMR Corp (AMR.N: Quote, Profile, Research, Stock Buzz), parent of American Airlines, more than doubled during oil’s drop over the past month, while those of United Airlines parent UAL Corp (UAUA.O: Quote, Profile, Research, Stock Buzz) tripled and Delta Air Lines (DAL.N: Quote, Profile, Research, Stock Buzz) doubled.
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