Airlines set to post losses; merger talk looms

By @ibtimes on

U.S. airlines, which are set to report quarterly losses starting next week, also are poised for a stronger 2010, helped by an economic rebound that bolsters traffic, fares and the chances for an industrywide merger frenzy.

Of the six largest U.S. carriers, only Southwest Airlines is expected to eke out a profit for the first quarter. AMR Corp , parent of American Airlines, will lead off the airline earnings reports on Wednesday.

Investors will be tuned in for more signs of recovery that have supported airline shares lately.

They also will scrutinize comments from UAL Corp's United Airlines, US Airways Group and Continental Airlines , which are reportedly in merger talks.

The outlooks should ... be good, and I expect business travel is beginning to come back along with job growth and overall company profitability, said Morningstar equity analyst Basili Alukos. I'm very curious to hear what UAL, Continental, and US Airways have to say about the merger scenario.

UAL is said to be in merger discussions with both US Airways and Continental. None of the airlines has confirmed the talks.

The airline industry has been hit in recent years by volatile fuel prices and an economic downturn that drained travel demand. Carriers have reported improved traffic and fuller planes as the economy rebounds.

There's been a tremendous recovery in pricing and unit revenue over the first quarter, said Andrew Watterson, an airline consultant at Oliver Wyman, a management consulting company.

This could be a breakthrough, even though the economy as a whole is kind of unsatisfyingly growing, Watterson said. Even modest growth creates more business for the airlines.

He noted that sweeping capacity cuts in 2008 and 2009 helped the industry ride out a painful oil rally that drove up fuel prices. Later, the capacity cuts insulated carriers from the economic recession.

Those two traumas seem to have subsided for now, giving airlines a chance to claw their way back to stability.

The capacity discipline that kind of kept them alive during the fuel crisis of '08 and the economic downturn of '09 now is feeding a strong recovery in 2010, Watterson said.

Airlines also have benefited from a series of new fees for products and services sold to passengers at the airport or during flights. Such fees have become the norm in U.S. air travel, although some are controversial.

Last week, Spirit Airlines said it would charge up to $45 for carry-on luggage. The news prompted U.S. Senator Charles Schumer to introduce legislation that would prevent airlines from charging a fee for carry-on bags.

Airlines shares have been gaining since March 2009. The Arca airline index <.XAL> rose 12 percent in the first quarter, which typically is one of the weakest for airlines.

Analysts remain bullish on the sector in general, but some caution that a 20 percent rally in crude oil prices since February to more than $83 a barrel on Friday could pose a problem going forward.

We, like many, are concerned about rising fuel prices but note most airlines are on a relatively level playing field from a fuel cost standpoint, unlike during much of the 2008 fuel crisis, said Stifel Nicolaus airline analyst Hunter Keay in a research note on Thursday.

Airline shares were broadly weaker on Friday, following the broader market, which sank on news that Goldman Sachs Group Inc was charged with fraud by the U.S. Securities and Exchange Commission. The airline index was down 3.74 percent in late morning trade.

(Reporting by Kyle Peterson; Editing by Phil Berlowitz)

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