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US airline profits seen up; still long-term doubts
Tue Oct 31, 2006 3:16pm ET
Market View
DALRQ (Delta Air Lines Inc )
Last: $1.07
Change: -0.02 (-1.83%)
Revenue (ttm): $16,733.0M
EPS: -35.11
Market Cap: $213.12M
Time: 11:02am ET
Stock Details
Company Profile
Analyst Research
Company News:
US airline profits seen up; still long-term doubts
UPDATE 2-Airlines rescind last week's fare increases
RPT-UPDATE 1-Airlines rescind last weeks' fare hikes
More Company News... Email This Article | Print This Article | Reprints [-] Text [+] By Dena Aubin
NEW YORK, Oct 31 (Reuters) - Improved pricing will likely boost U.S. airline profits next year, but the next economic downturn may bring a return of bankruptcies and possibly liquidations, analysts at a distressed debt conference said on Tuesday.
Strong worldwide economies and healthy demand will allow airlines to raise ticket prices early in 2007, helping boost profits regardless of what happens to the price of oil, said Ray Neidl, senior airline analyst at Calyon Securities.
"If that's the case, I do expect to see airlines do a lot of stock issues next year, particularly legacy carriers," said Neidl.
Prospects for older "legacy" carriers have improved as bankruptcies and fleet reductions reduced excess capacity and higher fares boosted profits.
"The low-cost carriers are the ones on the ropes now," Neidl said. "Their (business) models that worked beautifully when oil was at $20 or $30 a barrel do not really work too well with oil at $60," Neidl said at a Financial Research Associates (http://www.frallc.com) distressed debt conference.
Raising ticket prices is difficult for the low-cost carriers because consumers would switch to legacy carriers or curtail travel altogether, he said.
The fundamental problem is the airline industry has all the characteristics of a natural monopoly but cannot earn monopolistic profits because of competition, said Martin Fridson, chief executive of independent research business FridsonVision.
"This an industry that has had 100 bankruptcies over the past 25 years," said Fridson. "They've been free to compete vigorously and they've gone broke regularly." Continued...
Without the ability to earn monopolistic profits, "the rate of bankruptcies will continue," Fridson said. "This will be true even if all the unions go defunct and fuel prices decline by 50 percent."
Industry consolidation remains the long-term solution to airline's woes, but the U.S. Justice Department is not likely to allow large-scale mergers, Neidl said.
If approved by regulators, partnerships would be preferable to mergers because they provide "80 percent of the benefits of a merger without all the problems," he said.
The need to integrate airlines' different labor unions, corporate cultures, fleet types and computer systems makes mergers tricky, he said. Financing would also be difficult because airlines' balance sheets have not yet recovered from the industry slump following the Sept. 11, 2001, attacks, he said.
For now, airline shares rather than bonds are the way to play the industry's upturn, Neidl added.
"There's not a play on the unsecured bonds unless you want to play Delta or Northwest bonds for new equity in these companies," he said. Bonds of Delta Air Lines Inc. (DALRQ.PK: Quote, Profile, Research) and Northwest Airlines Corp. (NWACQ.PK: Quote, Profile, Research), which filed for bankruptcy in September 2005, are expected to be exchanged for new equity when the companies emerge from Chapter 11.
© Reuters 2006. All Rights Reserved
Tue Oct 31, 2006 3:16pm ET
Market View
DALRQ (Delta Air Lines Inc )
Last: $1.07
Change: -0.02 (-1.83%)
Revenue (ttm): $16,733.0M
EPS: -35.11
Market Cap: $213.12M
Time: 11:02am ET
Stock Details
Company Profile
Analyst Research
Company News:
US airline profits seen up; still long-term doubts
UPDATE 2-Airlines rescind last week's fare increases
RPT-UPDATE 1-Airlines rescind last weeks' fare hikes
More Company News... Email This Article | Print This Article | Reprints [-] Text [+] By Dena Aubin
NEW YORK, Oct 31 (Reuters) - Improved pricing will likely boost U.S. airline profits next year, but the next economic downturn may bring a return of bankruptcies and possibly liquidations, analysts at a distressed debt conference said on Tuesday.
Strong worldwide economies and healthy demand will allow airlines to raise ticket prices early in 2007, helping boost profits regardless of what happens to the price of oil, said Ray Neidl, senior airline analyst at Calyon Securities.
"If that's the case, I do expect to see airlines do a lot of stock issues next year, particularly legacy carriers," said Neidl.
Prospects for older "legacy" carriers have improved as bankruptcies and fleet reductions reduced excess capacity and higher fares boosted profits.
"The low-cost carriers are the ones on the ropes now," Neidl said. "Their (business) models that worked beautifully when oil was at $20 or $30 a barrel do not really work too well with oil at $60," Neidl said at a Financial Research Associates (http://www.frallc.com) distressed debt conference.
Raising ticket prices is difficult for the low-cost carriers because consumers would switch to legacy carriers or curtail travel altogether, he said.
The fundamental problem is the airline industry has all the characteristics of a natural monopoly but cannot earn monopolistic profits because of competition, said Martin Fridson, chief executive of independent research business FridsonVision.
"This an industry that has had 100 bankruptcies over the past 25 years," said Fridson. "They've been free to compete vigorously and they've gone broke regularly." Continued...
Without the ability to earn monopolistic profits, "the rate of bankruptcies will continue," Fridson said. "This will be true even if all the unions go defunct and fuel prices decline by 50 percent."
Industry consolidation remains the long-term solution to airline's woes, but the U.S. Justice Department is not likely to allow large-scale mergers, Neidl said.
If approved by regulators, partnerships would be preferable to mergers because they provide "80 percent of the benefits of a merger without all the problems," he said.
The need to integrate airlines' different labor unions, corporate cultures, fleet types and computer systems makes mergers tricky, he said. Financing would also be difficult because airlines' balance sheets have not yet recovered from the industry slump following the Sept. 11, 2001, attacks, he said.
For now, airline shares rather than bonds are the way to play the industry's upturn, Neidl added.
"There's not a play on the unsecured bonds unless you want to play Delta or Northwest bonds for new equity in these companies," he said. Bonds of Delta Air Lines Inc. (DALRQ.PK: Quote, Profile, Research) and Northwest Airlines Corp. (NWACQ.PK: Quote, Profile, Research), which filed for bankruptcy in September 2005, are expected to be exchanged for new equity when the companies emerge from Chapter 11.
© Reuters 2006. All Rights Reserved
