Airlines Expected to Report Soaring Profits

CHICAGO (Chicago Tribune/TNS) -

It’s a big week for the C-level suites at U.S. airlines, as major domestic carriers are expected to announce strong profits on the wings of lower fuel prices and strong demand from U.S. passengers.

However, that’s unlikely to lead to lower fares or fewer fees for fliers, according to analysts.

Delta started the hit parade Tuesday by beating Wall Street profit estimates and projecting $2 billion in lower fuel costs for 2015 — although it technically took a loss in the fourth quarter, because it had to devalue its fuel-hedging contracts. Hedging acts as insurance against rising oil prices, but loses value when oil prices fall, as they have in recent months.

United Continental Holdings, parent of United Airlines, is slated to report fourth-quarter and full-year 2014 profits Thursday, when it is expected to announce quarterly profits of $1.21 per share, which would be its largest fourth-quarter profit since the 2010 merger of United and Continental.

So far, United has trailed competitors in profitability even though its stock price soared 76.8 percent in 2014. It has become a Wall Street darling for its shares’ future prospects, receiving mostly buy ratings from analysts.

Southwest Airlines is scheduled to report earnings Thursday, as well.

Meanwhile, American Airlines, which reports Tuesday, does not hedge with fuel contracts and stands to gain the most from falling prices.

As a group, airlines are among the industries to benefit most from lower oil prices, which have dropped by more than half since June 2014, according to Moody’s Investor Service, which this week changed its outlook on the global airline industry to positive from stable. Fuel represents 30 to 50 percent of an airline’s operating expense.

Passenger demand will also increase in coming months “due to steady economic growth, higher disposable incomes and rising air travel in developing economies,” Moody’s said.

But that doesn’t necessarily translate to cheaper flights, it said.

“The U.S. airlines’ savings are unlikely to be passed on to customers as record-high load factors and sustained demand lessen the incentive to do so,” Moody’s said, adding that the windfall will be used for debt reduction, aircraft purchases and shareholder returns.

Industry analyst Hunter Keay, of Wolfe Research, upgraded his outlook on the airline industry last week, saying he saw hopeful signs, such as airlines not adding extra seats as oil prices fall or relenting on airfares or extra fees that are so profitable for carriers.

“It gives us incremental hope that while the behavior we’re seeing isn’t perfect, it’s certainly good enough for this industry to make a lot more money than we thought it would,” Keay wrote in a note to investors. “As we look ahead into 2015, we see a potential windfall of money-making for airlines on lower fuel and still-OK revenue.”