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Airline Credit Risk - Here We Go Again
Tim Jones, (April 16, 2002)

Wall Street expects major US airlines to report more than $2 billion in first-quarter losses this week even as the aviation industry steadily recovers from the weak economy and the steep travel slump that followed the September 11 attacks on the United States.

A spike in oil prices, lingering airfare sales and higher security costs have tempered the industry's recovery, chipping away at fragile revenues in its traditionally weakest quarter. Despite signs of improved traffic, leading carriers have already warned they expect to post big first-quarter losses -- possibly the second worst in their history -- as they struggle with negative cash flow since the hijacking attacks.

Only Southwest Airlines Co. among the majors is expected to post a slight profit of about 3 cents a share. "It's clearly getting better on all fundamental vitals -- though it helps to remember that the current revenue declines remain more than twice as bad as the worst months in previous recessions," said UBS Warburg analyst Sam Buttrick, who is predicting a quarterly loss of more than $2 billion.

Wall Street analysts said they are watching how airlines manage expenses and for guidance on the second quarter and beyond. Several carriers have said they are eyeing a revenue recovery in the second half of the year. Airlines must balance restoring fleet capacity -- dramatically reduced after Sept. 11 -- with the return of air travel demand. Too swift a return to larger fleets could hamstring financial health, analysts said.

The first quarter is usually one of the airline industry's weakest as fewer people travel in winter months. But this year, bad news could not come at a worse time after the record losses sustained in 2001; major US air carriers reported losses of $3.2 billion in the fourth quarter alone.

Still, first-quarter results have already been discounted into airline stocks, said Buttrick. Shares of major airlines have corrected about 15 percent over the past month from recent highs as investors express worries over fuel prices, fare changes and analyst downgrades, he said.

The American Stock Exchange airline index is up more than 17 percent since the start of the year compared with the S&P 500 benchmark, which is down about 3.2 percent. American Airlines, a unit of AMR Corp. and the world's largest carrier, said that it expects to report a sizable loss for its first-quarter and would likely report a full-year loss.

Delta Air Lines, the No.3 US carrier, said it also expects to post a loss, but that it could be profitable by year-end, assuming a recovery in traffic and yields. US Airways Group also warned about a first-quarter loss.

Several airlines may also give further guidance or updates on their recovery plans. United Airlines, a UAL Corp. unit, has approached its unions seeking billions of dollars in concessions from employees. US Airways, under new management, is also approaching workers to trim costs.

Both airlines have said they are studying an application for the federal loan guarantee portion of the government's $15 billion bailout program.

With airlines reliant on an economic rebound and a return of lucrative business travel, outlook beyond the first-quarter remains mixed. Credit Suisse First Boston analyst James Higgins said he increasingly believes the second quarter may bring more negative news, driven by the depressed revenues and fuel.

"In general, we expect airline managements to guide second quarter estimates downward," he said in a note to clients.

Earlier this month Continental Airlines, one of the few profitable carriers last year, warned a recent hike in fuel prices and a weaker revenue recovery would make it a challenge for the airline to post a second-quarter profit as it earlier forecast.



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