S&P: Turbulence Not Over For Airlines

    May 19, 2005

Standard & Poor (S&P) said the airline industry would continue flounder amid higher fuel costs, stiff competition from cheaper airlines and increasing labor costs. S&P said on Thursday in their semi-annual survey of airlines that investors will be hard pressed to make money with most major airlines.

The report said that while companies like Southwest and JetBlue would probably survive, the big airlines like Delta and US Airways could be at the “tipping point” for 2005. The number tell the tale of the dwindling number of big airlines because they’ve had massive losses for the last few years and the low cost carriers have been picking up market share left and right.

“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 this 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 US 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%, year over year, substantially under-performing the S&P 500 index, which fell 2.6%. 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 under-performed the broader market for years, falling 6.8% in 2004 (versus a 9.0% increase for the S&P 500), rising 6.3% in 2003 (+26.4% for the S&P 500), declining 39.8% in 2002 (-23.4%), and 29.7% in 2001 (-13.0%).

All this comes on the heels of major industry problems. United recently dumped all their pensions and other lines continue to look at these types of options as they struggle through possible bankruptcy. Also, US Airways is attempting a merger with American West, which has many American West employees scratching their heads

To pick up the survey go to S&P’s site. They have the survey for sale.

John Stith is a staff writer for WebProNews covering technology and business.