Lots of Red Ink Seen for Airlines 4Q

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Lots of Red Ink Seen for Airlines 4Q By Mary Ellen Podmolik CNBC.com Contributor Higher fuel prices squeezed or wiped out profits for much of the airline industry in the third quarter. The fourth quarter, isn't shaping up to be much better.

While news broadcasts show airports teeming with passengers at the holidays, the fourth quarter is typically the second-weakest period for the industry, surpassed only by the first quarter. Why? Corporate travelers, who drive revenue growth for most airlines, stay home.

And this year, there are two more wrinkles thrown into the earnings models. First, comparisons with December 1999 results are expected to be messy because of a Y2K downturn in traffic a year ago. And this year, airlines also will have to deal with

still-steep prices for jet fuel as refineries switch to producing home heating oil for the winter months.

UAL Corp.'s {UAL} United Airlines and US Airways Group Inc. {U} already have warned Wall Street that they expect to post losses for the fourth quarter. Analysts expect Trans World Airlines Inc. {TWA} to finish the quarter in the red, too, and say fourth-quarter profitability at Alaska Air Group Inc. {ALK} and America West Holdings Corp. {AWA} is iffy.

"Near term, it remains a fuel story," says Rob Milmore, an airline analyst at Arnhold & S. Bleichroeder. "On the cost side, it's who's better hedged. On the revenue side, you also have the fuel impact if oil remains at these high levels. Will the economy slow? If the economy slows, you'll see a slowdown in corporate travel. That's the problem in 2000, 2001."

The cost of crude oil isn't the only thing being watched these days, however. A potential settlement of the Justice Department's antitrust lawsuit against Northwest Airlines Corp. {NWAC} could provide a glimpse into whether the federal government is taking a tougher stance on airline-merger plans. The government seeks to force Northwest Airlines to sell its 14% stake in Continental Airlines Inc. {CAL}, a stake that gives it a 54% voting control in its competitor. A trial had been expected to start last Wednesday, but it was delayed until this Wednesday because the Justice Department said Northwest is preparing a settlement offer.

"Any ruling the Justice Department makes will really make a statement about how the department views consolidation," Milmore says. "This could lead to other airlines doing more talking among themselves."

Apparently, they already are. In addition to the announced merger plans last May between UAL and US Airways, AMR Corp.'s {AMR} American Airlines confirmed in a Securities and Exchange filing last week that it has continued to talk during the past months with potential merger partners. Speculation about how other airlines would compete against a UAL-US Airways marriage quieted down during the summer, as it became clear that such a deal would have wide-ranging conditions.

"The company is considering its strategic response to the possibility of industry consolidation, and from time to time is engaged in discussions with other carriers regarding significant business combinations and acquisition of assets," AMR said in the regulatory filing.

But not all analysts expect the Justice Department's decision to be the ruling heard round the industry. "I think one of the things with the Northwest-Continental deal is just the complications," says Brian Harris, an analyst at Salomon Smith Barney. "It's an unusual structure. That's one of the issues and one could argue were it an outright merger, the Justice Department view may be someone different."

Looking ahead to 2001, it isn't just fuel that has analysts worried. Non-fuel costs, particularly labor, are rising 2% to 3% annually. Combine that with fuel hedges ending for most carriers and it could produce a further squeeze on margins. Typically, that was the time when airlines raised fares. But analysts worry that corporate road warriors and their employers may be willing to take on only so much.

"At some point, you see businesses saying we can't pay these high prices, you've got to find a better fare," says Jim Parker, an analyst at Raymond James & Associates. "Business fares were inelastic but they're becoming more elastic."

Parker points to a case in point: Southwest Airlines Inc. {LUV}, the airline once viewed primarily as a leisure carrier for families going on vacation. In the third quarter, just over 40% of its passengers were corporate travelers.

http://www.cnbc.com/commentary/commentary_full_story_Stocks.asp?StoryID=25385

-- Martin Thompson (mthom1927@aol.com), November 01, 2000


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