3 Reasons Airline Earnings Will Tank in 2012

For an airline industry well acquainted with reversals of fortune, the bad news just keeps on coming: Global airlines’ earnings will drop 30% to a paltry $4.9 billion in 2012. On revenues of $632 billion, that amounts to a razor-thin margin of 0.8%. North American carriers like American Airlines parent AMR Corp. (NYSE:AMR), Delta (NYSE:DAL), United Continental (NYSE:UAL), Southwest (NYSE:LUV) and US Airways (NYSE:LCC) face serious challenges from the “continuing economic gloom” that will drive down 2012 profits to a mere $1.2 billion.

That’s sobering news for airline stock investors less than two weeks ahead of quarterly earnings reports. On the bright side, third-quarter revenue at some U.S. airlines will be stronger than expected. United Continental expects a 9.5% to 10.5% increase in passenger unit revenue for the period, while AMR is looking at an increase of 7.5% to 8.5%. Both airlines are scheduled to report earnings Oct. 17.

Although some airline stocks will beat Wall Street estimates this quarter, headwinds facing the sector will be tough to manage. “The industry has shifted gears downward,” Tony Tyler, Director General of the global airline association IATA, said last week. “The pace of growth in passenger markets has dipped, and the freight business is now shrinking at a faster pace.”

North American carriers appear to be having a tougher time than their European and Asian counterparts. While international passenger demand rose 6.2% in August compared to the same month last year, North American carriers reported the weakest performance: 2.9% growth. Travel within the U.S. actually fell by 0.3% in August.

So what will continue driving the hard times? Here are three reasons airline stocks’ earnings will tank in 2012:

Fuel Costs. The high cost of jet fuel continues to be the bane of airlines’ existence. Not only are prices still hovering in the $3-per-gallon range — many airlines are saddled with expensive fuel hedges. If prices continue at those levels in 2012, it will add $15 billion to airlines’ operating costs.

Anemic GDP. IATA’s 2012 forecast is based on projections that the global gross domestic product will grow by only 2.4%. Traditionally, airlines have lost money every time GDP has slipped below 2%. “We will be perilously close to that level, at least through 2012,” Tyler said. “The industry is brittle. Any shock has the potential to put us in the red.

Burdensome Taxes And Regulations. U.S. airlines face substantially higher costs as their regulatory and tax burdens increase. The Court of European Justice last week ruled that any airline using an EU airport could be taxed under its greenhouse emissions trading scheme. U.S. airlines would be forced to pay more than $3.1 billion in EU taxes between 2012 and 2020, the Air Transport Association of America estimates. In the U.S., regulators plan to require airlines to break down all ancillary fees such as checked bag or assigned seat charges — a move that could cost each airline as much as $1 million a year. Other new rules will cost even more money. Starting in January, airlines must display all government taxes and fees in their prices, notify passengers of cancellations, diversions and delays of more than 30 minutes and allow customers to cancel penalty-free within 24 hours of booking or seven days before departure.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.

Article printed from InvestorPlace Media, https://investorplace.com/2011/10/3-reasons-airline-earnings-will-tank-in-2012-amr-dal-ual-luv-lcc/.

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