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  • Airlines to Wall Street: Where is the Love?
    Posted by Joe Anselmo 3:08 PM on Mar 05, 2012

    Consider this the next time you grab a cup of coffee at the airport: The market capitalization of Starbucks exceeds that of the 12 largest U.S. Airlines -- combined. Soaring fuel costs pushed the average profit margin of those carriers down to 0.3% in 2011, or a still-meager 2% if you factor out American Airlines, which has been in Chapter 11 bankruptcy protection since late November. Delta Air Lines and United Airlines are holding their own, and US Airways is still operating in the black, but as far as Wall Street is concerned there is more profit in café lattes than air travel.

    That is a great frustration to an industry that has made big improvements to its fundamentals. Consolidation, lower labor costs and much greater discipline in expanding capacity have enabled airlines to halt billions of dollars in losses. But carriers’ balance sheets remain exposed to factors they can¹t control: economic turmoil, terrorism, disease outbreaks and, most of all, volatile oil prices that could skyrocket if the brewing crisis over Iran’s nuclear program leads to another Middle East war.

    U.S. airlines spent more than $50 billion on jet fuel last year, up 30% from five years earlier, despite the retirement of scores of older, gas-guzzling jets. The good news is that most major U.S. carriers have hedged 20-40% of their fuel costs for 2012. That contrasts with the previous decade, when Southwest Airlines locked in most of its fuel costs at ultra-low prices, and struggling mainline carriers had few or no hedges. The result was a market imbalance that forced Southwest’s competitors to incur deep losses to compete with its low fares.

    Today, “airlines are pretty much all in the same boat in terms of needing to raise revenues when fuel goes up,” says Standard and Poor¹s airline analyst Phillip Baggaley. Still, they haven¹t been able to increase fares fast enough. The average yield per passenger among U.S. airlines was up 9% in January from a year earlier, but fuel prices increased 18% during the same period.

    The federal government could give the industry a boost by easing the costs and long delays that visitors from rapidly growing economies face in acquiring U.S. visas. Zhihang Chi, Air China’s vice president and general manager for North America, notes that 750,000 Chinese tourists visited the U.S. in 2010, while 3.7 million went to Europe. In fact, the U.S. attracts more visitors from South Korea -- who aren¹t required to obtain visas -- than China, which has 27 times as many people. “You see the potential,” says Chi.

    An executive order issued in January by President Barack Obama is designed to increase visa processing capacity in China and Brazil by 40%. But that alone is not likely to make airlines more attractive to investors. “They have made progress on what they can control,” says Baggaley. “However, the industry is inherently risky and will be low-margin for the foreseeable future.”

    Tags: TW99, AWCOL

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