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Airline stocks seek altitude in 2010

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Honey Ryder
Feb 26, 2004

Airline Stocks Seek Altitude in 2010
By Ted Reed 01/05/10 - 10:13 AM EST
Stock quotes in this article: DAL , CAL , AMR , LUV , AMR , UAUA , LCC
Airline stocks could prosper in 2010, despite the disquieting risks that terrorist attacks pose for air travel.

The "2010 outlook bodes well for airline shares," said Morgan Stanley analyst William Greene, in a recent report. Airlines typically do well when GDP is growing, and Morgan Stanley expects 2010 GDP growth of 3%.
"We believe that we are firmly in the recovery phase of the typical airline industry cycle, which is characterized by improving demand trends in conjunction with generally stable unit costs," Greene said. He expects revenue per available seat mile to improve, while cost per available seat mile moderates.

Continental provided an upbeat early indicator late Monday, saying that revenue per available seat mile continues to improve. Consolidated RASM fell by 3.5% to 4.5% in December, compared with an 8.5% decline in November.

JPMorgan analyst Jamie Baker said Continental's performance "handily exceeded our forecast" and boosted his fourth-quarter estimate for the carrier to a loss of 5 cents, up from a loss of 30 cents. He said the improvement provides "further evidence of core, sequential demand improvement," and likely portends similar improvement at American

Greene's 2010 estimates are less bullish than the consensus: One reason is that he sees a potential for "capacity creep," as airlines add seats in an improving economy. Still, Greene has assigned overweight ratings to the four biggest network carriers: American, Continental, Delta and United.

As usual, the potential for rising oil prices poses a threat. "Airlines are vulnerable to a renewed increase in oil prices, due to economic recovery in developing economies such as China, rather than in the U.S. or Europe," wrote Standard & Poor's analyst Philip Baggaley, in a recent report. On the positive side, "North American airlines have raised substantial amounts of new debt and equity over the past several months, taking advantage of buoyant capital markets," he said.

The key to expected improvements for airline stocks is that the industry has sharply reduced capacity, starting in the second half of 2008. Domestic capacity declined by 12.7% between October 2007 and October 2009, according to the Air Transport Association.

However, the benefit of capacity cuts, originally undertaken in response to high fuel prices, has been slow to accrue to some carriers. Of the nine largest airlines, four showed stock-price increases during 2009, while five showed declines.
Shares in Southwest rose 33% in 2009; shares in Alaska and AirTran rose 18%, and shares in United rose 17%. Meanwhile, shares in Continental and Delta fell 1% each; shares in JetBlue fell 23%; shares in American fell 28% and shares in US Airways fell 37%.

The terrorist attempt to blow up a Northwest flight on Christmas had little impact on airline stocks, but it nevertheless underscored the most critical point in airline investing: Shares remain vulnerable to events, including weather, oil price swings, economic trends, government decisions and terrorist acts, over which the carriers have no control.

"Airline security dominated the industry's holiday news, but should not have a major effect on airline finances," wrote CreditSights analyst Roger King, in a report. "Passengers adapted to taking off belts and nail clippers, then shoes, (to) restrictions on liquid containers, and now quite likely (to) body scanners."
They said that about '09 too didn't they?

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