The Zacks Analyst Blog Highlights: United Continental Holdings, Delta Air Lines, Southwest Airlines, AirTran Holdings and AMR

CHICAGO, April 11, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: United Continental Holdings Inc. (NYSE: UAL), Delta Air Lines (NYSE: DAL), Southwest Airlines Co. (NYSE: LUV), AirTran Holdings (NYSE: AAI) and AMR Corporation (NYSE: AMR).

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Here are highlights from Friday's Analyst Blog:

Land, Sea, Oil Mar Sky Carriers

The U.S. air carriers recorded only modest improvements in traffic during March. Airline traffic is measured in billions of revenue passenger miles (RPM), which implies one mile flown by one passenger.

Following the massive earthquake and tsunami in Japan on March 11, carriers introduced drastic cuts in their capacity. Fears of flying to Japan soared and the demand for air travel dropped, hurting the overall profitability. Persistently rising fuel prices have also surfaced as a major headwind to the airlines industry.

However, we believe the carriers will be able to handle these two situations. In all probability, the capacity cuts are temporary, and should last only for the next two-three months. Also, the U.S. carriers are combating rising fuel prices with increasing fares and extra fees.

The consolidated March traffic dipped 2.2% at United Continental Holdings Inc. (NYSE: UAL), the largest U.S. airline. Both domestic and international traffic declined 2.3% and 2.4%, respectively.

The 2.1% growth in capacity (or, available seat miles) was offset by 350 bps year-over-year decline in the load factor (percentage of seats filled with passengers). United Continental expects 8% to 9% year-over-year increase in unit revenue for the month of March, measured by passenger revenue per available seat mile (PRASM), a key metric in airlines.

We believe United Continental will continue to benefit from merger synergies, global network, strong competitive positioning, low costs, fleet optimization and a strong liquidity position. The Zacks Consensus projects a loss of 37 cents for the first quarter of 2011, representing an improvement from a loss of 55 cents in the year-ago quarter.

However, the magnitude of the loss was increased in the last 7 days and 30 days from 30 cents and 25 cents, respectively. This was the result of the company's decision to cut its Japan flights.

Delta Air Lines (NYSE: DAL), the second largest U.S. airline, reported a 0.5% year-over-year traffic increase in March on a 6.2% capacity growth partially offset by a 450 bps decline in load factor. Domestic traffic inched up 0.7% year over year on capacity increase of 3.2%, partially offset by a 210 bps decline in the load factor to 83.3%. International traffic also got a 0.2% year-over-year nudge from a 10.9% capacity increase while load factor decreased 800 bps to 74.3%.

The Zacks Consensus projects a loss of 42 cents for the first quarter compared with a loss of 23 cents in the year-ago quarter. This represents a significant 81.03% year-over-year decline. In addition, the magnitude of the loss was increased in the last 7 days and 30 days from 38 cents and 18 cents, respectively.

We believe the capacity cuts in Japan will result in declining profitability for the company. Delta Air Lines has the largest presence in Japan relative to other U.S. carriers.

The low-cost carrier Southwest Airlines Co. (NYSE: LUV) recorded a 9.8% year-over-year rise in March traffic on a capacity increase of 8.9%. The month's RPM increased to 7.3 billion from 6.7 billion in March 2010. Load factor grew to 81.6% from the year-ago level of 81%. The company expects PRASM to increase 8% to 9% year over year for March 2011.

Since Southwest provides point-to-point services in the U.S., it was not impacted by the catastrophe in Japan. Our current Zacks Consensus Estimate for Southwest Airlines is 3 cents for the first quarter, which is flat with the year-ago quarter. However, we do not see any increase from the year-ago level due to escalating fuel prices, which are likely to eat away the profits of the company.

We believe Southwest Airlines' acquisition of AirTran Holdings (NYSE: AAI), scheduled this year, should augur well. March traffic for AirTran Airways, a subsidiary of AirTran Holdings, grew 5.5% year over year to more than 1.8 billion on capacity increase of 6.8%. Load factor expanded 100 bps to 82.8% from the year-ago quarter.

March traffic for American Airlines, a wholly owned subsidiary of AMR Corporation (NYSE: AMR), inched up 0.8% year over year on capacity increase of 2.6% partly offset by a 150 bps decline in load factor. Strong international traffic was partially offset by weak domestic traffic.

Currently, we maintain our long-term Neutral rating on Southwest Airlines and Delta Airlines, and Underperform rating on United Continental Holdings. For the short term (1–3 months), Southwest Airlines retains the Zacks # 3 (Hold) Rank, Delta Airlines retains the Zacks #4 (Sell) Rank, and United Continental Holdings has a Strong Sell rating with Zacks #5 Rank.

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