Business | Aviation
Investors shun aviation stocks despite oil respite
Relatively cheap fuel and major downsizing will lead to US airline profits in 2009, analysts say, but a mediocre rebound by airline stocks since July shows equity investors are less optimistic.
- Reuters
- Published: 23:31 December 7, 2008
Chicago: Relatively cheap fuel and major downsizing will lead to US airline profits in 2009, analysts say, but a mediocre rebound by airline stocks since July shows equity investors are less optimistic.
In the first half of 2008, US airline stocks plummeted on skyrocketing energy prices. And as stunning as the oil rally was, the decline of oil prices is even more spectacular.
Airline shares, however, haven't fully recovered from their decline because investors have serious doubts about future demand for air travel in a weak economy.
"You've got the culmination of lower fuel prices but not necessarily lower fuel prices for the right reason," said Helane Becker, airline analyst at Jesup & Lamont.
From January through July, crude oil rallied more than $50 (Dh183.6) a barrel to a $147.27 peak in July. Since then, the price has fallen more than $100 a barrel due to global economic turmoil.
The rally in oil, which directly influences the price of jet fuel, punished airlines and threatened to undo the progress they made during years of painful restructuring.
In the first six months of this year the Amex airline index fell 63 per cent as fuel costs grew. The airline index, however, reclaimed only 62 per cent of its value despite the lifting of the fuel burden.
The industry is rife with concerns about declines in both leisure and business travel as economic weakness and increasing unemployment erode travel budgets.
Airlines have seen sharp declines in traffic but have blunted the impact by slashing seating capacity.
American Airlines, a unit of AMR Corp, said its traffic fell 14.5 per cent in November, while capacity declined 9.3 per cent. United Airlines, a unit of UAL Corp, reported a 17 per cent drop in traffic and a 14.2 per cent decline in capacity. Other airlines had similar results.
Becker said that while worries about travel demand are depressing airline shares she believes the industry will perform better than is widely expected if they restrain capacity.
"I personally think the environment is not going to be quite as bad as people think," she said.
Costly contingencies
Airlines, meanwhile, have one more glaring weakness that has prevented more robust enthusiasm for their stocks. The fuel hedges they purchased to offset rising fuel prices in many cases are worthless because of falling fuel prices.
Carriers chalked up millions of dollars in accounting losses in the third quarter related to the diminished value of fuel hedges. Southwest Airlines, which for years was the envy of the industry due to its thorough hedging program, wrote down $247 million in noncash losses.
Basili Alukos, an airline analyst at Morningstar, said airline hedging strategies continue to pose a risk, singling out the use of costless collars for criticism - derivatives that lock in a price for oil if it rises beyond a preset level. Airlines, however, also pay the difference if the price falls below the range.
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