CreditSights Sees “Horrible” 2008 for Airlines
Investors in airline stocks had better tighten their seat belts. There’s more turbulence up ahead.
High oil prices and anticipated demand issues weigh very heavily on airlines, CreditSights says in a new analysis of the industry. Airlines may not be able to increase prices enough to cover all fuel cost increases. Debt covenant issues will cause credit issues at American (NYSE: AMR), US Airways (NYSE: LLC), Northwest (NYSE: NW) and United (NYSE: UAUA).
CreditSights says there is no reason to be positive or neutral on airline securities, but Continental (NYSE: CAL), Delta (NYSE: DAL) and Southwest (NYSE: LUV) should perform best relative to the industry.
“No one can be positive or neutral on airlines given the outlook for oil and the allegedly weakening economy,” CreditSights says. “The latest spike in oil prices, whether sustained or not, just punctuates the income difficulties airlines will face in 2008.”
Look to airlines to take a machete to their schedules-cutting out all unprofitable flights and fully exploiting any non elastic demand-and rendering current 2008 guidance, assumptions, and estimates obsolete.
“The airlines will have to capitulate and completely reengineer their business plans-culling older aircraft, reducing frequencies, and raising fares to elastic limits,” Cthe report says. “Labor demands for higher wages will be contentious but ultimately unsuccessful. With merger mania almost dead, potential airline combinations will be limited to rare cases where significant infrastructure rationalizing can occur-if at all because that would create political hurdles with labor and service cuts.”
Investors looking for intra-industry relative performance should focus on international exposure, fleet age and fuel economy, aircraft delivery schedules, and long-term labor contracts. Continental and Delta remain the best bets.
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