Zacks Industry Outlook Highlights: United Continental Holdings, Delta Air Lines, Southwest Airlines, JetBlue Airways and US Airways Group

CHICAGO, Jan. 11, 2012 /PRNewswire/ -- Today, Zacks Equity Research discusses the Airlines, including United Continental Holdings Inc. (NYSE: UAL), Delta Air Lines (NYSE: DAL), Southwest Airlines Co. (NYSE: LUV), JetBlue Airways Corporation (Nasdaq: JBLU) and US Airways Group Inc. (NYSE: LCC).

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A synopsis of today's Industry Outlook is presented below. The full article can be read at  

http://www.zacks.com/stock/news/67581/Airline+Stock+Outlook+-+Jan.+2012

The airline industry was hit hard in 2011, by the unrelenting market turmoil and rising fuel costs after a strong rebound in 2010. Major carriers experienced declining year-over-year earnings and revenues. Unfortunately, we foresee a similar scenario in 2012.

Conditions could worsen in 2012, stemming from the weak outlook for Europe given its financial problems. According to the International Air Transport Association (IATA), airlines are expected to generate overall profits of $3.5 billion in 2012, down from the estimated $6.9 billion in 2011 and $16 billion in 2010. This steep decline in the industry's profitability is a function of the overall unfavorable macro backdrop in which the industry has to operate this year.

Regional Forecast

North America: North American airlines like United Continental Holdings Inc. (NYSE: UAL),Delta Air Lines (NYSE: DAL), Southwest Airlines Co. (NYSE: LUV), JetBlue Airways Corporation (Nasdaq: JBLU) and US Airways Group Inc. (NYSE: LCC) that were untouched by the Euro-crisis will benefit the most in 2012. These carriers have also shown improvements thanks to higher ticket prices, capacity cuts and improved ancillary revenues. These firms together are expected to post profits of $1.7 billion in 2012.

Asia-Pacific: The 2012 profit projection from the Asia-Pacific carriers is $2.1 billion. Notably, this is the highest profit-producing region in the industry outside the home market, outstripping other areas.

Middle East & Latin America: Per IATA, profits from the Middle East and Latin American carriers are expected to plunge from 2011 levels to $300 million and $100 million, respectively.

Africa: African air carriers are expected to incur a loss of $100 million due to weaker yields after touching the break-even point in 2011.

Europe: As for the European airlines, the IATA projections show a loss of $600 million for 2012, indicating a downswing from a profit of $1 billion in 2011. The weak economy and higher passenger taxes are largely responsible for the downturn.

Lagging Indicators

Airfreight is declining as world trade is deteriorating and shippers are moving away from costlier air transport. The end of 2011 showed weak traffic growth in Europe and the other affected markets, particularly in the Middle East/North Africa region. Though Tunisia is showing signs of recovery, traffic to Egypt and Libya are still disrupted. Hence, we believe the recovery of airfreight depends on the overall health of the European economy.

Despite the weak economic growth, travel demand is picking up. The IATA projects a slowdown in global airline passenger growth to 4% in 2012 from 6% in 2011. The cargo market is expected to remain stable in 2012.

In the worst-case scenario of a full-blown Euro-zone crisis, Europe will likely drag the U.S. into a recession as well, pulling down growth in China and other emerging economies. In that scenario, losses in the global airline industry would be quite large, perhaps the worst since the 2008 financial crisis. Every region of the world would be affected, though Europe would be worst hit, followed by North America and then the Asia-Pacific region.

In the base-case scenario, there are several factors that will drive airline profits in 2012:

Fuel Price Rise: Bane or Boon?

Airline profit outlook depends on fuel prices, the major variable component in the industry. Escalating fuel prices are making aircraft operations expensive and are changing the sector's overall dynamics. Airlines need to figure out ways to counter rising fuel expenses.

High crude oil prices, largely a function of geostrategic forces, are outside of the control of the airlines. We expect crude oil and jet fuel prices to remain largely stable this year, but forecasting this key variable with any level of accuracy has always been extremely challenging (Hedging strategies discussed below).

While air carriers are contemplating a more effective and enduring way to counter the rising costs, passing on the increased cost to customers in the form of fare hikes seems an easy way out. Airlines have already imposed about 10 broad fare increases in 2011, which has been successful with the rise in travel demand. If demand remains strong and the fuel price continues to rise, then carriers will be able to earn higher through fare hikes in 2012.

Getting Rid of Unprofitable Jets

Air carriers believe capacity reduction is another way to counter rising fuel costs. The companies are scrapping or cutting flights in many small U.S. airports that are unprofitable.

According to the Airports Council International, 27 airports including those at St. Cloud, Minnesota and Oxnard, California lost services from the well-known airlines over the last two years. Instead, the carriers are adding long-distance flights. It is easy to charge more from passengers traveling long distance rather than the shorter routes.

New Advertising Rule

The U.S. Department of Transportation (DOT) laid new pricing rules for the air carriers effective January 26, 2012. Airline companies have to include all taxes and fees while advertising fares for their flights. Previously, the carriers were allowed to advertise ticket prices excluding taxes and fees, which could add up to 20% to the price of air travel.

We are apprehensive that the new advertising policy will look expensive to passengers and hit the stocks. As the passengers are switching to low fares, the new rules might hurt the travel demand, thereby leading to lower industry profits.

Rightsizing

Air carriers are also focusing on fleet rightsizing. Though initially expensive, it seems the correct strategy to lower non-fuel costs. Air carriers are replacing their older fleet with new fuel-efficient aircraft, to optimize cost efficiency of their aircraft.

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