The airline industry needs to figure out ways to counter rising fuel expenses, which is estimated at $178 billion for this year and $198 billion for the next. Fuel will account for 30% of industry costs compared with 13% a decade ago. Despite higher ticket prices and improved ancillary revenues, air carriers have been struggling with rising fuel prices for the past several months.
In order to alleviate the pressure, the carriers have been passing on the increased cost to customers in the form of fare hikes, which are helping these stocks to be profitable. Airlines have imposed about 10 broad fare increases this year but some refused to raise ticket prices. Air carriers are also focusing on cutting capacities and streamlining their costs by reducing non-fuel expenses.
Airline traffic is customarily measured in billions of revenue passenger miles (RPM), which implies one mile flown by one passenger.
The consolidated November traffic dropped 3.6% at the largest U.S. airline United Continental Holdings Inc. (UAL). Both international and domestic traffic declined 2.2% and 5.6%, respectively. The 30 basis point (bp) year-over-year increase in the combined load factor (percentage of seats filled with passengers) was offset by a 4% decrease in combined capacity (or available seat miles). United Continental expects a 10.5% to 11.5% year-over-year increase in unit revenue for the month of November, measured by passenger revenue per available seat mile (PRASM), a key metric for airlines.
The November traffic for the second largest U.S. airline Delta Air Lines (DAL) fell 1.9% year over year due to falling international travel demand. Consolidated capacity fell 4.1% while the load factor improved 190 bps to 81.4%. Domestic traffic inched up 1.4% year over year on 320 bps expansion in load factor, which partly offset capacity reduction of 2.6%. International traffic dropped 7.3% year over year on a 6.5% decrease in capacity and 60 bps decline in load factor.
The low-cost carrier Southwest Airlines Co. (LUV) recorded growth of 2.5% year over year in November traffic on a capacity increase of 0.7%. The month’s RPM increased to 8.3 billion from 8.1 billion in November 2010. Load factor increased to 81.6% from the year-ago level of 80.2%. The company expects PRASM to increase 9% year over year for November 2011.
The discount U.S. airline JetBlue Airways Corporation (JBLU) reported a 10.9% year-over-year traffic increase in November 2011, the highest compared to its rivals. On a year-over-year basis, capacity climbed 7.7% and load factor grew 240 bps to 83.3%. The company expects PRASM to increase 15% year over year for November 2011.
The month’s traffic for American Airlines, a wholly owned subsidiary of AMR Corporation (AMR), dipped 1.7% year over year on a capacity reduction of 4% partially offset by a load factor increase of 190 bps. Both international and domestic traffic declined 1.8% and 1.7%, respectively. American Airlines recently filed for bankruptcy protection, which would help it to cut down expenses and position it for consolidation. Notably, American Airlines could merge with US Airways Group Inc. (LCC).
We expect airline traffic to remain challenging over the next year due to the Euro-zone sovereign debt crisis that has dwarfed economic growth. The problems in Europe are swelling and spilling over to the rest of the world. The International Air Transport Association (IATA) cut its global airline industry profit forecast to $3.5 billion from $4.9 billion for 2012. Overall cost is expected to rise 4.5% to $609 billion, with the fuel cost being $198 billion.
In the worst case, if the Euro-zone crisis shapes into a recession, the global airline industry could incur a loss of $8 billion next year – the worst since the 2008 financial crisis.
Although the $178 billion estimated fuel cost would be a drag on the bottom line, the IATA still projects a profit of $6.9 billion for this year.
We are currently maintaining our long-term Outperform rating on Delta Air Lines and Neutral ratings on United Continental, Southwest Airlines and JetBlue. For the short term (1-3 months), the carriers retain the Zacks #3 (Hold) Rank. AMR Corp. retains a short-term Strong Sell rating with the Zacks #5 Rank.
