by Susan J. Aluise | November 4, 2011 7:40 am
On the surface, airline performance seems to be taking off — operational performance measurements like load factors are on the rise, and flights are likely to be packed for the holidays. Even JPMorgan analysts were optimistic about the sector on Thursday, noting that airlines have a good shot at being “profitable in a recession” — even though that’s never happened in the industry’s history.
But you only need to peek at the most recent earnings reports to know that it’s still a tough time to make money in this business. United Continental (NYSE:UAL), AMR Corp.’s (NYSE:AMR) American Airlines, Delta (NYSE:DAL) and SkyWest (NASDAQ:SKYW) all missed analysts’ estimates.
Southwest (NYSE:LUV) and US Airways (NYSE:LCC) fared better, but both airlines took big hits on fuel-related costs. JetBlue (NASDAQ:JBLU) earnings slipped 23% over the same quarter last year, while Alaska Air’s (NYSE:ALK) profit fell 37%.
And the positive news of full holiday flights ignores the fact that passenger volume is expected to fall by 2%. Airlines are rolling with that challenge by substituting smaller, more fuel-efficient aircraft on many routes.
Still, a global slowdown in passenger markets has disproportionately affected North American carriers, which reported a mere 2.9% growth in August. That’s the weakest performance in any region — and a huge drop from the 5.6% growth rate earlier this year. Fare and fee hikes by airlines are unlikely to offset the lost income.
Although airline stocks look pretty cheap right now (having fallen an average of 41% this year), here are three reasons to avoid them at any price right now:
Is the airline industry down forever? No, but there is still a lot of risk that’s not priced in for the sector. And individual airlines have their own headwinds, too. The bankruptcy watch for AMR may continue if a merger partner doesn’t show up. Southwest’s merger with AirTran will inject costly complexity and impact performance in the short term. Fuel price volatility will continue to hit all airlines and a still-sluggish economy likely will impact margins at least through the second quarter of 2012.
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