Fuel costs put airlines back into the red

NEW YORK (CNNMoney.com) -- After almost two years of profits, the airline industry will hit turbulence and post a fourth quarter loss due to high jet fuel prices, according to a leading analyst.

Ray Neidl of Calyon Securities cut his earnings forecast on most major airlines. He said fuel costs have averaged $2.55 a gallon so far in the fourth quarter, up 16 percent from a $2.20 average in the third quarter.

He now projects a combined $59 million loss for the industry, well down from a previous estimate of a $273 million industrywide profit. The industry should still be able to stay profitable for the full year, but the earnings outlook was trimmed to $3.5 billion from $3.9 billion.

Neidl said fare increases on domestic routes are covering only 30 to 40 percent of the increased fuel costs, although higher fare hikes on international routes have managed to prevent losses there.

The airline industry as a whole lost an estimated $35 billion from 2001 through 2005, according to the Air Transport Association, the industry trade group. It returned to profitability with the second quarter of 2006 and as an industry has been profitable since then.

Neidl cut the earnings forecast of 10 of the 11 carriers he covers, with only United Airlines parent UAL Corp. (Charts, Fortune 500) staying unchanged with an estimate of a 28 cent a share loss.

He is now forecasting a fourth quarter loss, rather than his earlier profit estimate, at three of the nation's largest airlines - American Airlines parent AMR Corp. (Charts, Fortune 500), Delta Air Lines (Charts, Fortune 500) and Northwest Airlines (Charts, Fortune 500). He also sees low cost carrier AirTran Holding (Charts) swinging to a loss rather than a profit. The only old-line carrier he didn't cut to a loss was Continental Airlines (Charts, Fortune 500), which he now projects as break-even for the quarter rather than profitable.

But Neidl still forecasts fourth quarter profits at the leading low cost carriers, Southwest Airlines (Charts, Fortune 500) and JetBlue (Charts), although he cut his earnings estimates there as he did at US Airways Group (Charts, Fortune 500). And he increased his loss estimate at Alaska Air (Charts) and Frontier Airlines (Charts).

He also cut earnings forecasts for 2008 on all 11 airlines he covers, although he projected profits at each of them, and he trimmed his price target on the eight carriers for which he now has such forecasts. His ratings on each airline was unchanged, even with the earnings and price target cuts.

"Going into the slow winter season and with current fuel price and economic uncertainties we maintained our ratings and will review them after the holiday period," he wrote.

Shares at 10 of the 11 carriers he covered were down in mid-morning trading Tuesday, with only Alaska Air showing a gain.

Neidl forecasts that industrywide earnings should bounce back to about $4.4 billion in 2008, although that was down from his previous estimate of a $5.1 billion profit for next year.

"We are assuming a slow growth economy but no recession next year with stable, but high, fuel costs," he cautioned. "Under this scenario we do not see airline stock prices significantly moving until mid-winter, at which time there is the potential for a rally as the market anticipates a relatively strong and profitable heavy spring/summer travel season."