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Airlines see profits from cuts, fees as fuel costs fall12:00 AM CDT on Monday, October 13, 2008 In the first half of 2008, airlines warned that soaring fuel prices were forcing them to cut flights, furlough employees, ground airplanes, hike fares and impose numerous new fees. And then the price of jet fuel dropped like a rock. Now, some observers are predicting that the capacity cuts, combined with the lower fuel bills and higher revenues, are putting airlines on the road to solid profits – in 2009, if not the last half of 2008. In a research note last week, airline analyst Jamie Baker of J.P. Morgan Chase said he sees a profit next year for every jet airline he follows, even if airlines encounter one of the weakest periods for demand in the industry's history. "Simply put, we are having a tough time modeling losses," he told investors.
Credit the rapid decline in the price of fuel for much of the improved results. Crude oil closed Friday at $77.70 a barrel, a 13-month low. That compares to peaks over $145 a barrel in early July. As a result, jet fuel prices have plummeted, from spot prices well over $4 a gallon in early July to under $2.75 a gallon in recent days. The Air Transport Association says that a one-cent increase in the cost of a gallon of jet fuel increases the industry's fuel bill by $187 million. That would suggest that the drop of more than $1.25 per gallon since July could save the industry more than $23 billion. Of course, $77-a-barrel oil would have been a recipe for losses only a few years ago. But airlines cut their costs, and then took a set of extraordinary steps early in 2008 as they faced the prospect of crude oil spiraling upwards. Now, with energy costs going down, the airlines are benefiting from the extra revenue gained from charging for bags, frequent-flier tickets, pillows, blankets, soft drinks and other money-raising ideas that carriers have implemented. A number of airlines have predicted hundreds of millions of dollars of new revenue. They also expect to be able to raise fares steadily by squeezing capacity. Wall Street has taken notice and has grown notably more optimistic about airlines' prospects. Three months ago, the consensus of analysts was that eight of the nation's 10 largest carriers would lose money in the quarter ended Sept. 30. Now, the consensus is that only six will lose money. For 2009, analysts are expecting eight of those 10 carriers to make money, compared to their view three months ago that only Dallas-based Southwest Airlines Co. would be profitable next year. Major carriers begin providing quarterly results this week with Fort Worth-based AMR Corp. reporting on Wednesday and Southwest on Thursday. Northeastern University finance professor Harlan Platt, who follows the airline industry, said an unknown is whether demand for airline travel will stay up. "These analysts had better bear in mind that while fuel costs have come down, so too have needs for travel," Mr. Platt said. "The economy is slowing, and businesses are sending their people to travel less," he said. "Those who aren't working are very concerned about the future, and they're probably going to reduce their travel plans." Mr. Baker, in his note, said he expects airline revenues to be up only 3 percent in 2009. But even if revenues were flat, airlines would still be profitable, he said. "Based on our forecast, 2009 revenue would have to fall 5 percent before EBIT [earnings before interest and taxes] losses were to occur and a whopping 10 percent before liquidity came under intense pressure," he said. "Both of these demand outcomes are inconsistent with any observation since the dawn of commercial flight," Mr. Baker added. But the wild card remains fuel prices, he said. "Quite frankly, we can't keep up with what has turned out to be the most rapid and significant cost improvement ever witnessed," he wrote. "At this point, 2009 is likely to be the first time since 2002 that per-gallon prices declined, while industry capacity has rolled back to 1998."
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