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The second quarter will be ugly, with a capital ugh

AMR results may herald $910 million in airline losses

Jul 15, 2008

AMR Corp., whose American Airlines is the world's largest carrier, probably will post a second- quarter loss tomorrow, heralding industry losses of as much as $910 million on rising jet-fuel costs.

``The second quarter will be ugly, with a capital `ugh,''' said Henry Harteveldt, a Forrester Research Inc. analyst in San Francisco.

An 80 percent surge in jet fuel in the past year reduced airlines' usual boost from the start of the summer travel season. U.S. carriers are grounding 433 jets and cutting about 22,000 jobs to stem 2008 losses that the Air Transport Association estimates may reach a record $13 billion.

Delta Air Lines Inc. and Southwest Airlines Co. may be the only profitable carriers, based on analysts' estimates. Losses at the eight biggest U.S. airlines will total $910 million before special items, Merrill Lynch & Co. analyst Michael Linenberg in New York projected on July 8.

AMR may say it lost $319 million, its third straight quarterly deficit and the most of any U.S. carrier for the period, based on the average of six analyst estimates compiled by Bloomberg.

A $328 million first-quarter loss was the largest for Fort Worth, Texas-based AMR since the last three months of 2005. Delta also reports tomorrow.

More Projections

William Greene, a Morgan Stanley analyst in New York, said he expects the eight airlines to record combined losses of about $785 million, while the average estimate of analysts surveyed by Bloomberg is $787 million. The number of estimates varied for each airline.

The carriers racked up profits of $1.9 billion a year earlier, the best quarter since 2000. The group's operating losses totaled $1.62 billion in the first three months.

Airlines are ``just in shock,'' said Michael Derchin, an analyst at FTN Midwest Research Securities Corp. in New York. ``They never in their wildest dreams or scenarios dreamed oil would be like this for this long. All the contingency plans they never thought they'd need have been put into action.''

Analysts will be looking for clues about bookings beyond the summer travel season. Demand typically falls in the year's last four months, a drop that may be steeper this year as U.S. consumer confidence hovers near its lowest level since 1980.

``The most important information will be the pricing and revenue outlook,'' said Philip Baggaley, a Standard & Poor's credit analyst in New York.

Comments on Cash?

Investors also should heed any comments from executives about options for raising cash, according to William Warlick, senior director of Fitch Ratings in Chicago. All major U.S. carriers likely will have a rapid erosion of cash when travel declines after Labor Day, Warlick said.

``The U.S. industry's current structure is unsustainable in the current fuel environment,'' he said today in a report.

Future fares and demand will help show whether carriers' plans for a 9 percent reduction in seating capacity will stem the jump in fuel, which has surpassed labor as the industry's biggest expense. Airlines will start their job and capacity cuts after summer travel ends.

`Waiting to See'

``They're waiting to see what happens in the fall, and they're ready to move pretty quickly,'' Derchin said. ``They already know they need to cut more, just based on where oil is right now.''

Earnings at Southwest, the largest low-fare carrier, again may be protected by its strategy of locking in lower fuel prices in advance, while Delta probably will benefit from moves during its 2005-07 bankruptcy to reduce operating costs, according to analysts' estimates.

AMR and Delta's reports will be followed by Continental Airlines Inc.'s on July 17. United Airlines parent UAL Corp., US Airways Group Inc. and JetBlue Airways Corp. will announce results July 22. Northwest Airlines Corp. will release figures on July 23 and Southwest on July 24.

AMR said July 2 that the quarter will include as much as $1.27 billion in writedowns for the costs of employee severance and the lower value of jets being retired. UAL said last week it will record non-cash charges of as much as $2.7 billion.

AMR and UAL are among the year's worst performers among the 14 carriers in the Bloomberg U.S. Airlines Index, tumbling 68 percent and 90 percent. UAL's decline is the biggest. Through yesterday, the market value of the eight largest airlines slid 45 percent this year to less than $16 billion.

The following table shows average estimates for net income (net losses) and per-share results for the eight largest U.S. airlines by traffic, based on analysts surveyed by Bloomberg.

Airline Net Income/Net Loss Per-Share
In Millions Results
AMR ($319) ($1.39)
UAL ($276) ($1.97)
Delta $45 $0.11
Continental ($46) ($0.47)
Southwest $73 $0.11
Northwest ($148) ($0.53)
US Airways ($95) ($1.11)
JetBlue ($21) ($0.08)

AMR results may herald $910 million in airline losses

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