Airline companies might hit rough weather in the days ahead. The shares of major air carriers plunged yesterday following the reduced airline profit projection by International Air Transport Association (IATA).
The largest U.S. airline United Continental Holdings Inc. (UAL) shares slumped 3.26% and the second largest U.S. airline Delta Air Lines (DAL) shares dropped 3.01%. The shares of low-cost carrier Southwest Airlines Co. (LUV) and the discounted U.S. carrier JetBlue Airways Corporation (JBLU) fell 2.82% and 2.11%, respectively.
American Airlines, a wholly owned subsidiary of AMR Corporation (AMR), suffered the most with a 3.69% drop in the share price.
The IATA cut its 2011 overall profit outlook by a massive 54% to $4 billion due to rising fuel prices as well as the ongoing turmoil in Japan, North Africa and the Middle East. This is the second time the IATA reduced its profit forecast in the last 6 months. The Association had slashed its 2011 profit projection to $8.6 billion previously in March, from its prior expectation of $9.1 billion.
Fuel will account for 30% of the industry costs this year compared with 13% a decade ago. The price of Brent crude stood at 115.84 per barrel as on June 3, up 61% over the last year.
U.S.carriers are expected to generate profits of $1.2 billion compared with the prior outlook of $3.2 billion provided in March. Last month, Delta Air Lines announced plans to trim its capacity by 4% post Labor Day and offered worker buyouts for the first time since 2009. United Continental has scrapped plans to boost capacity by 2% this year to keep it similar to 2010.
The airline industry recorded $16 billion in profits in 2010 following a turnaround after losing $16 billion in 2008 and $9.9 billion in 2009. We believe the airline industry has rebounded faster than expected driven by higher traffic and air travel demand. However, rapid expansion in capacity, natural calamities as well as rising fuel prices stalled the rebound and hit hard the industry this year.
We are currently maintaining our long-term Neutral rating supported by the Zacks # 3 (Hold) Rank on Delta Air Lines, United Continental, Southwest Airlines and JetBlue. AMR Corp. also retains a short-term Hold rating with the Zacks # 3 Rank.
AMR CORP (AMR): Free Stock Analysis Report
DELTA AIR LINES (DAL): Free Stock Analysis Report
JETBLUE AIRWAYS (JBLU): Free Stock Analysis Report
SOUTHWEST AIR (LUV): Free Stock Analysis Report
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