You may recall the airline industry's promising start a year ago, building on the recovery in 2010 from the global financial crisis in 2008. But the favorable operating climate didn't last. A surge in oil prices, an epic natural disaster in Japan and the European sovereign debt crisis created yet another round of major problems for carriers. So is it any wonder that airline stocks over the last 12 months lost 27% of their value? Here's the real surprise: Wall Street is bullish for the industry's prospects in 2012, despite the fact that it has been a textbook study in destroying shareholder value for the last 10 years.
Whether the financial analysts' upbeat outlook will actually pan out, of course, is highly questionable. Of the last round of challenges to shake up the industry, only one—the effects of the natural disaster in Japan on air travel—has resolved itself. Fuel prices remain stubbornly high, the economic recovery is no less fragile than it was a year ago, and Europe is teetering on falling into a recession, if it hasn't already. And let's not forget the specter of Iran threatening to disrupt the flow of oil from the Persian Gulf.
A close review of the U.S. airline industry's stock performance would support the premise that the sector is spiraling down fast. Setting aside, whose parent, AMR Corp., filed for bankruptcy on Nov. 29, share prices of U.S. carriers started 2012 on a dismal note, down by double digits across the industry.
Nonetheless, some analysts believe better days are ahead. “The sector is undervalued,” insists Ray Neidl at Maxim Group. He is forecasting the U.S. industry, excluding American, to report a $3.5 billion profit for 2011—and earn nearly double that amount of profits this year. He reasons that the industry is continuing to reap the benefits of consolidation.
For example,' acquisition of Northwest Airlines allowed it to de-emphasize underperforming hubs in Memphis and Cincinnati, just as Continental Airlines is scaling back at Cleveland. And Standard and Poor's analyst Phil Baggaley notes that is digesting and realigning AirTran Airways and rethinking its Atlanta strategy. (Like Aviation Week & Space Technology, S&P is a unit of The McGraw-Hill Companies.) On the demand side, consumer confidence is building, and desire for both business and leisure travel is rising. Moreover, if the euro falls relative to the dollar, Europe could become a more attractive vacation destination for Americans, Baggaley says.
Of course, it's possible the global economy could go from bad to worse; the current forecast is for growth of between 1.5-2%. In addition, taxes and regulations—including more stringent flight and duty time rules in the U.S., not to mention the European Union's emissions trading system—threaten to take a bite out of the industry's revenues. For now, though, optimism prevails. “As long as Greece doesn't fall into the Mediterranean and the Strait of Hormuz remains open, we could see a major rally in one to three months,” says Neidl.
|Current||Previous||Fwd.||Tot. Ret. %||Tot. Ret. %|
|Company Name||Week||Week||P/E||3 Yr.||1 Yr.|
|ACE Aviation Holdings||10.19||10.15||-16.5||30.0||-19.2|
|AerCap Holdings N.V.||11.89||11.48||6.1||178.5||-15.6|
|Alaska Air Group||72.85||74.43||8.3||146.4||15.4|
|Allegiant Travel Co.||53.50||53.96||15.0||39.8||11.6|
|Atlas Air Worldwide Holdings||41.55||39.28||8.0||93.6||-20.3|
|BBA Aviation plc||2.77||2.79||10.1||145.2||-16.6|
|B/E Aerospace Inc.||41.25||38.93||16.1||347.9||5.2|
|Copa Holdings SA||64.00||61.26||8.6||132.6||10.9|
|Delta Air Lines Inc.||8.61||8.01||3.7||-23.8||-31.2|
|Hawaiian Holdings Inc.||6.00||5.59||4.5||7.1||-23.6|
|Lines Co. Ltd.||36.55||38.56||7.7||17.2||-42.1|
|Lan Airlines SA||23.90||24.03||19.5||178.1||-20.9|
|Republic Airways Holdings Inc.||3.73||3.48||4.8||-63.7||-47.1|
|United Continental Holdings, Inc.||18.01||18.52||3.5||54.6||-30.5|
|United Parcel Service Inc.||74.61||73.84||16.0||61.8||6.8|
|WestJet Airlines Ltd.||11.28||11.64||10.4||-14.4||-17.5|
|Zodiac Aerospace SA||88.26||85.94||13.7||161.8||27.6|
|Source of financial data: Standard & Poor’s and Capital IQ Inc. (a Division of Standard & Poor’s) U.S. dollars and cents. Forward P/E ratio uses S&P and Capital IQ forecasts of current fiscal year.|