Amid higher oil prices and continuing industry pricing pressures, airline equities remain a difficult place for investors to make money, concludes Standard & Poor's in its semi-annual survey on airlines, published last week. Although low-cost carriers such as Southwest and JetBlue Airlines have been able to cope much better than their higher-cost competitors in this environment, S&P believes that 2005 could become a possible tipping point for giants such as US Airways and Delta Airlines. These and other findings are available in the report, the Airlines Industry Survey, published twice yearly by Standard & Poor's, a leading provider of independent investment research, ratings and indices.
Standard & Poor's says that the major carriers can no longer withstand the massive losses they have sustained over the past four years and that just as they are taking drastic steps to survive, the largely profitable low-cost carriers are rapidly gaining market share and may be poised to take over the lion's share of the industry in the future. According to S&P's calculations, the net loss incurred by the top 10 carriers totaled $10.0 billion in 2004 on revenues of $91.3 billion, following losses of $4.5 billion in 2003 (on revenues of $87.2 billion), following losses of $11.1 billion (on revenues of $80.9 billion) in 2002, and $7.6 billion ($87.2 billion) in 2001.
"Our view is that the prospects for the industry's ongoing financial recovery remain at risk because of oil prices, overcapacity, poor balance sheet health, and worries about terrorism," said Jim Corridore, S&P equity analyst and author of the report. "Although the market environment has been brutal, the carriers that operate with low costs and low fares have been able to cope much better than their higher-cost competitors. Most likely these low-cost carriers will continue to grow revenues at a much faster rate than the legacy carriers. Eventually, such carriers could take an overwhelming share of the U.S. air travel market."
According to the Airlines Industry Survey, in the first quarter of 2005, Standard & Poor's airlines stock price index declined 14.6 percent, year over year, substantially under-performing the S&P 500 index, which fell 2.6 percent. S&P sees the poor performance of the airlines index in this period reflecting worries about oil prices, airline bankruptcies, and serious questions about when the industry will return to profitability. The airlines index has underperformed the broader market for years, falling 6.8 percent in 2004 (versus a 9.0 percent increase for the S&P 500), rising 6.3 percent in 2003 (+26.4 percent for the S&P 500), declining 39.8 percent in 2002 (-23.4 percent), and 29.7 percent in 2001 (-13.0 percent).
The Airlines Industry Survey also provides in-depth examinations of individual airlines, looking at a possible dissolution or merger at US Airways, and related issues at Delta and AMR Corp., parent of American Airlines. In addition, the survey looks at traffic, capacity and yield trends, impact of oil prices, whether labor costs are still too high, the ongoing matter of airlines' pension liabilities and more.
For more information on Standard & Poor's Industry Surveys, visit sandp.ecnext.com/.