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Jan.14

8:31 AM ET

Wednesday, 14 Jan 2009

Airline Stocks Flying High

Posted By:Yolaiki Gonzalez | Ariel Nelson

Topics:Airlines | Stock Market

Airlines stocks are flying high, leaving the global recession in their wake as the price of crude oil continues to tumble. The deteriorating economic outlook has made for a big build up in the crude inventories for which the U.S. Energy Information Administration reported an increase of 6.7 million barrels for week ending 1/12. Despite the curb in crude supplies from the Organization of Petroleum Exporting Countries, tensions in the Middle East, and energy disputes between Russia and Ukraine, crude for February delivery futures continue a downward spiral. NYMEX crude for February delivery traded down for 5 consecutive days as of Monday, only to settle slightly up 0.5% on Tuesday at $37.78/barrel.

Crude has fallen more than 73% from its summer peak of $147.27/barrel, inversely to the AMEX Airline Index (XAL), the benchmark tracker for airline stocks which has climbed more than 74% in the past six months, after it dropped to its 52-week low of $12.66 on 7/15/08.

Consequently, the unprecedented plunge in oil prices have led many of the airlines stocks higher, with 64% of the AMEX Airline Index components gaining above 15% in the past six months. Leading the way higher were shares of major U.S. carriers including US Airways [LCC Loading... () ], Alaska Air [ALK Loading... () ], and Delta Airlines [DAL Loading... () ] whose shares have gained about 63%, 62%, and 47% respectively in the past six months on lower fuel prices. Delta, the world's largest airline carrier after its acquisition of Northwest, has also gained from its December plan to cut its domestic seat capacity in 2009 by 8% to 10% and international flying seats by 3% to 5%. Others with higher stock prices include Texas-based American Airlines [AMR Loading... () ] whose shares have rallied 21% in the past six months, and are currently up 2.16% year to date.

However, for how long will airline stocks continue their rally from lower fuel costs? According to the Air Transportation Association forecast for 2009, the airline industry is expected to report an industry-wide loss of $2.8 billion due to the dire economic situation and lower consumer demand. Yet many analysts are optimistic about the second half of the year as major carriers are in greater position to return to profit due to their capacity cuts as airlines are able to keep planes relatively full in spite of slowed passenger demand.

Will there be a surprise when airlines begin releasing their fourth quarter earning results this month? Many of the commercial carriers will report from 1/21-1/29. Discount airliner Southwest [LUV Loading... () ] may become profitable again as analysts are anticipating a gain of 7 cents/share on revenue of $2.67 billion for fourth quarter when the company reports earnings on 1/22. Southwest had reported a loss for the third quarter, its first quarterly net loss since October 1991. The company recently announced that its December traffic rose by 1.1% to 5.8 billion revenue passenger miles compared to 5.7 billion revenue passenger miles flown in December 2007. Although analysts are making upward revisions in their estimates for some major carriers like Continental Airlines [CAL Loading... () ], some moderate losses in the last quarter are still expected. Analysts are projecting a smaller loss in 4Q earning estimates for Continental of $1.03/share on revenue of $3.5 billion. The Houston-based carrier will publish its 2008 results on 1/29, and had previously reported an increase in December revenue per available seat mile of 5% from 4%, thus its shares have also seen a mild boost of 39% in the past six months, and are currently up approximately 6% year to date.