From: Reuters
Published January 11, 2008 03:47 PM

Quarterly losses to cast doubt on airline recovery

By Kyle Peterson

CHICAGO (Reuters) - Most of the largest U.S. airlines are likely to post fourth-quarter losses, possibly signaling the end of an industry recovery that began in 2006 and further building a case for mergers.

While experts generally think the industry as a whole was profitable for all of 2007, the outlook for airlines is darkening due to persistently high fuel prices and a weakening U.S. economy.

According to Reuters Estimates, the only two major airlines likely to post a profit on an adjusted basis are Continental Airlines Inc <CAL.N> and low-cost carrier Southwest Airlines Co <LUV.N>. Results in the fourth quarter of 2006 were mixed and skewed by expenses related to the bankruptcies of Delta Air Lines Inc <DAL.N> and Northwest Airlines Corp <NWA.N>.

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Airlines begin releasing quarterly reports next week, with American Airlines parent AMR Corp <AMR.N> leading off. Analysts largely feel its results will be weaker than previously hoped.

"Nobody predicted $100-a-barrel oil. And then we're heading for an economic slowdown," said Ray Neidl, airline analyst at Calyon Securities.

Though Neidl said the industry as a whole is not necessarily in dire straits. "The airlines have definitely gotten into much better shape," he said, referring to major reorganizations and fare hikes since 2006.

Many airline experts, including leaders of top U.S. airlines, say the only way the industry can achieve lasting stability is through consolidation. Though mergers are usually complicated and more often than not controversial, they could help reduce excess capacity and cut costs.

Various merger ideas and rumors have circulated through the industry in recent years, but none has actually occurred since the 2005 acquisition of US Airways by America West to form the new US Airways Group Inc <LCC.N>.

Delta, the third-largest U.S. carrier, is now expected to start merger talks with Northwest and UAL Corp <UAUA.O>, parent of United Airlines. None of these airlines, however, has confirmed the reports, which surfaced in the media.

RACKING UP Q4 LOSSES

Analysts polled by Reuters Estimates predict losses excluding one-time items of 67 cents per share for AMR and 79 cents for UAL.

Continental was seen earning 10 cents per share. Southwest, less vulnerable to fuel costs than rivals due to aggressive hedging, was expected to earn 11 cents per share. For more on the industry's fuel costs, click on <ID:nN03209986>

The industry has been struggling recently to build on a recovery after a years-long downturn resulting from high costs and fierce competition. Top airlines have had some success cutting the number of seats for sale and raising fares.

As a result, the overall industry in 2006 posted its first net profit since 2000, according to the Air Transport Association.

But jet fuel prices offset that progress. And some experts question whether airlines can continue to raise fares enough if a weakening U.S. economy erodes travel demand.

"I think airlines have fended off the affects of high fuel prices for a long time, but their luck seems to have run out," said Joe Schwieterman, transportation expert at DePaul University.

"Fuel prices are so high now that even the most creative strategies won't be enough," he said. "There isn't much more they can do."

Airline consultant Darryl Jenkins agreed, saying he expects 2008 to be especially rocky.

"Oil is just killing everybody right now," Jenkins said. "Until jet fuel comes down, like I don't think it's going to, we're not going to see a whole lot of earnings this year."

(Editing by Braden Reddall)

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