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Airline Earnings Expected To Drop

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By TED JACKOVICS, The Tampa Tribune

Published: January 9, 2008

Airline passengers will face higher fares, but some airline earnings will be lower than originally estimated for 2008 and 2009, a Raymond James & Associates report said Tuesday.

Soaring fuel costs will prompt airlines to raise fares and trim capacity through fewer flights or by flying smaller aircraft. However, airline earnings will be "negatively impacted" until a reduction in domestic capacity catches up with fuel price escalation, the St. Petersburg-based investment firm said.

The Raymond James estimates assume that crude oil prices will range from $80 to $90 a barrel for 2008 and from $90 to $100 for 2009.

The report concurs with recent news of both airfare increases and predictions of earnings declines in the international airline industry, which last year enjoyed its first profitable year since 2000. The International Air Transport Association reported in December that global industry profits would decline from $5.6 billion in 2007 to $5 billion in 2008.

The latest airfare increases began Thursday with United Airlines, Delta Air Lines and Air Canada raising prices on certain routes, while AirTran Airways doubled its one-way fuel surcharge to $10.

"There is little evidence that fuel surcharges will be absorbed more readily by consumers vs. efforts to raise base fares, which have proven difficult," Raymond James analysts James D. Parker and Duane Pfennigwerth said in the portion of their report covering Orlando-based AirTran.

The revisions in full year, 2008 earnings estimates ranged from a decline in Air Tran Holdings shares from 60 cents to 15 cents to a decline from 65 cents to 55 cents for Southwest Airlines.

Not all of the report was gloomy, however. Raymond James continued to recommend Southwest Airlines stock because of its balance sheet strength with $1.5 billion in cash and industry-leading fuel hedge position.

Raymond James also recommended Allegiant Air, in part because of a lack of direct competition in small markets it serves, including St. Petersburg-Clearwater International Airport. The firm provides investment banking services for Allegiant Travel Co.

Domestic capacity for low-cost, legacy, and regional airlines is expected to decline by 1 percent in 2008, following a 2 percent growth in 2008, the earnings update reported.

"While this represents a step in the right direction, ultimately we believe more substantial capacity reduction would be required to fully offset fuel at current levels," the authors said.

Because of that, legacy airlines will be forced to remove older, less fuel-efficient aircraft.

Reporter Ted Jackovics can be reached at tjackovics@tampatrib.com or (813) 259-7817.

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