Airline rebound seen continuing into 2006 By Christian Plumb
Fri Dec 30,12:18 PM ET
NEW YORK (Reuters) - After the beleaguered U.S. airline industry hit a new low in September with two top carriers filing for bankruptcy, the sector has done what few thought it would or could -- it rebounded.
Now, as analysts and industry watchers look ahead to 2006, most see a sector in much better shape than a year ago with some airlines poised to return to profitability this year.
Further confounding expectations, those leading the comeback are the traditional airlines, which have lost billions in recent years and are burdened with enormous pension and other "legacy" costs.
"It's the leverage of surprise for the legacy carriers," said Standard & Poor's analyst Jim Corridore. "Everyone was expecting another horrible year, oil prices were climbing."
American Airlines' parent AMR Corp. (NYSE:AMR - news), Continental Airlines Inc. (NYSE:CAL - news) and US Airways Group Inc. (NYSE:LCC - news) have been some of the strongest gainers, and some analysts remain bullish on them for the New Year.
Shares of AMR has more than doubled, US Airways has gained 92 percent and Continental has soared 56 percent.
Facing a cloudier outlook are shares of one-time investor darlings Southwest Airlines Co. (NYSE:LUV - news) and JetBlue Airways Corp. (Nasdaq:JBLU - news), the leading U.S. low-cost carriers. Their shares are each up around 1 percent.
Southwest remains the industry's heavyweight, however, with a market capitalization in excess of $13 billion, or more than the rest of the industry combined.
A TRANSITION YEAR
"There's not a lot of surprise that could really come for Southwest and JetBlue in 2006, but there is a lot of surprise for AMR and Continental," Corridore said.
American and Continental will likely turn a profit in 2006 after years of losses, according to analysts polled by Reuters Research. Continental reported a small profit in 2003 helped by one-time gains.
Jet fuel prices are down some 43 percent from their highs following Hurricane Katrina, though they remain substantially more expensive than a year ago.
All airlines have been helped by moves by bankrupt Northwest Airlines Corp. (Other OTC:NWACQ - news) and Delta Air Lines Inc. (Other OTC
ALRQ - news) to get rid of planes and cut flights, easing a problem of too many seats chasing too few passengers.
Decreasing capacity and a strong economy have helped major airlines push through round after round of fare hikes, at least partly offsetting the higher fuel prices.
"I'm turning more bullish on the sector after being negative for the last five years," said Julius Maldutis, president of consulting firm Aviation Dynamics. "There's a case to be made that 2006 will be a transition year and the industry will return to profitability in 2007."
The legacy carriers have also radically restructured. Earlier this month, Continental reached a deal with its flight attendants, the final piece of a package of labor concessions aimed at saving the airline $500 million a year.
US Airways benefited from labor concessions won while it was in Chapter 11, as well as a merger that lured hundreds of millions of dollars in new investment.
To be sure, many remain cautious on the industry.
American, Continental and US Airways "have gotten way ahead of themselves and they were off a very, very low base," said Ray Neidl, an analyst with Calydon Securities.
At least one low-cost carrier, Air Tran Holdings Inc. (NYSE:AAI - news), has crashed the legacy airlines' party, rising 47 percent on hopes it would benefit from the bankruptcy of Delta, which competes with it out of Atlanta.
THE BIG 'MO'
US Airways has been boosted by investor faith in Chief Executive Doug Parker, mastermind of the merger of his America West Airlines with US Airways. Still, the carrier faces substantial challenges and is not expected to be profitable until 2007.
"The question that remains out there is, 'is this merger going to work or is it just going to follow the pattern of all the other (airline industry) mergers and be something quite negative,"' Maldutis said.
Yet U.S. Airways' rally, which has seen its market value soar to $2.6 billion, is also the most striking example of another ingredient in the sector's current rally: momentum.
"The momentum of the stocks themselves is attracting attention," Corridore said, adding that the stocks' rally has boosted several airlines' market value back up over $1 billion, widening the pool of potential investors.
Fri Dec 30,12:18 PM ET
NEW YORK (Reuters) - After the beleaguered U.S. airline industry hit a new low in September with two top carriers filing for bankruptcy, the sector has done what few thought it would or could -- it rebounded.
Now, as analysts and industry watchers look ahead to 2006, most see a sector in much better shape than a year ago with some airlines poised to return to profitability this year.
Further confounding expectations, those leading the comeback are the traditional airlines, which have lost billions in recent years and are burdened with enormous pension and other "legacy" costs.
"It's the leverage of surprise for the legacy carriers," said Standard & Poor's analyst Jim Corridore. "Everyone was expecting another horrible year, oil prices were climbing."
American Airlines' parent AMR Corp. (NYSE:AMR - news), Continental Airlines Inc. (NYSE:CAL - news) and US Airways Group Inc. (NYSE:LCC - news) have been some of the strongest gainers, and some analysts remain bullish on them for the New Year.
Shares of AMR has more than doubled, US Airways has gained 92 percent and Continental has soared 56 percent.
Facing a cloudier outlook are shares of one-time investor darlings Southwest Airlines Co. (NYSE:LUV - news) and JetBlue Airways Corp. (Nasdaq:JBLU - news), the leading U.S. low-cost carriers. Their shares are each up around 1 percent.
Southwest remains the industry's heavyweight, however, with a market capitalization in excess of $13 billion, or more than the rest of the industry combined.
A TRANSITION YEAR
"There's not a lot of surprise that could really come for Southwest and JetBlue in 2006, but there is a lot of surprise for AMR and Continental," Corridore said.
American and Continental will likely turn a profit in 2006 after years of losses, according to analysts polled by Reuters Research. Continental reported a small profit in 2003 helped by one-time gains.
Jet fuel prices are down some 43 percent from their highs following Hurricane Katrina, though they remain substantially more expensive than a year ago.
All airlines have been helped by moves by bankrupt Northwest Airlines Corp. (Other OTC:NWACQ - news) and Delta Air Lines Inc. (Other OTC
ALRQ - news) to get rid of planes and cut flights, easing a problem of too many seats chasing too few passengers.Decreasing capacity and a strong economy have helped major airlines push through round after round of fare hikes, at least partly offsetting the higher fuel prices.
"I'm turning more bullish on the sector after being negative for the last five years," said Julius Maldutis, president of consulting firm Aviation Dynamics. "There's a case to be made that 2006 will be a transition year and the industry will return to profitability in 2007."
The legacy carriers have also radically restructured. Earlier this month, Continental reached a deal with its flight attendants, the final piece of a package of labor concessions aimed at saving the airline $500 million a year.
US Airways benefited from labor concessions won while it was in Chapter 11, as well as a merger that lured hundreds of millions of dollars in new investment.
To be sure, many remain cautious on the industry.
American, Continental and US Airways "have gotten way ahead of themselves and they were off a very, very low base," said Ray Neidl, an analyst with Calydon Securities.
At least one low-cost carrier, Air Tran Holdings Inc. (NYSE:AAI - news), has crashed the legacy airlines' party, rising 47 percent on hopes it would benefit from the bankruptcy of Delta, which competes with it out of Atlanta.
THE BIG 'MO'
US Airways has been boosted by investor faith in Chief Executive Doug Parker, mastermind of the merger of his America West Airlines with US Airways. Still, the carrier faces substantial challenges and is not expected to be profitable until 2007.
"The question that remains out there is, 'is this merger going to work or is it just going to follow the pattern of all the other (airline industry) mergers and be something quite negative,"' Maldutis said.
Yet U.S. Airways' rally, which has seen its market value soar to $2.6 billion, is also the most striking example of another ingredient in the sector's current rally: momentum.
"The momentum of the stocks themselves is attracting attention," Corridore said, adding that the stocks' rally has boosted several airlines' market value back up over $1 billion, widening the pool of potential investors.
