The airline industry's pretax loss for 2005 is expected to be more than triple the previous estimates of one investment bank. The culprit: rising fuel prices.
Merrill Lynch analyst Michael Linenberg believes that the industry's losses for 2005 will balloon to $3.4 billion from $1 billion. The airlines, many of which have hedged less than half of their fuel purchases, just can't get a break. One step forward, two steps back.
On Monday, as the northeastern U.S. dug out from a weekend blizzard and frigid temperatures, crude oil futures topped $48 per barrel. In a research note, Linenberg noted that “every $1 move in the price of oil translates into a $450 million swing in industry pretax profits.”
The most well-insulated carrier is Southwest Airlines which has hedged, or locked-in, prices for about 85 percent of the fuel it will buy this year. JetBlue Airways is hedged at 20 percent, Alaska Airlines at 50 percent and America West at 42 percent.
Continental Airlines and Delta Air Lines may be well positioned to rebound if and when oil prices fall, since they have hedged far less of their purchases.
Merrill Lynch, which has no carrier rated higher than “neutral,” has lowered earnings estimates on nine of the 18 carriers in its coverage universe.
Not surprisingly, it's the regionals that are expected to record profits this year. Mesa Air Group, SkyWest and ExpressJet are among the very few that will. But that doesn't mean smooth sailing. On a recent conference call with reporters after its better-than-expected fourth-quarter results, ExpressJet Chief Executive James Ream said overcapacity and high fuel prices would make life difficult this year.
“We still think there are too many airplanes and too many operators,” he said. “If oil is going to stay above $45 a barrel for the balance of the year, those pressures are just going to mount.”
Indeed, Delta is undergoing a radical transformation in the hopes of staving off bankruptcy. Delta's plans, which include deep fare cuts and a simplified fare structure, will have a profound revenue impact on the rest of the industry.
Other airline executives might not like or agree with what Delta is doing, and they certainly don't welcome surging fuel prices. But most would agree that the industry needs to be restructured. Linenberg says high oil prices, while unwelcome, will accelerate that, including the possible exit of one or more carriers.
Something's gotta give.