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US airfares seen staying high

Airline investors are poised to reap big benefits from falling fuel bills that helped the US industry rack up record profits last year.

[DALLAS] Airline investors are poised to reap big benefits from falling fuel bills that helped the US industry rack up record profits last year. Consumers, not so much.

Fliers might hope to see some relief in the form of lower ticket prices, but airlines will probably use the windfall to reward shareholders first while demand for travel remains high and planes are flying with record numbers of seats sold.

There's "no reason" to trim prices in that environment, said Fred Lowrance, an Avondale Partners analyst in Nashville, Tennessee.

Domestic travelers are confronting fares that, at the end of the second quarter, were the highest they'd been in 11 years according to the US Bureau of Transportation Statistics. Airline profits meanwhile are forecast to have risen 65 per cent in the fourth quarter to US$2.72 billion, according to analyst estimates.

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"With all the money flowing in the door with lower jet- fuel prices, how much of that are these airlines going to hang onto?" Mr Lowrance said. Wall Street wants "to hear a commitment from the airlines that the cash flow is going to be put toward shareholder-friendly things." Executives may start laying out plans of what to do with the excess cash on Jan 20, when Delta Air Lines leads off quarterly earnings reports.

Airlines may use the fuel windfall to expand or add to share buyback programs or accelerate debt payments, said analysts including Joe Denardi, at Stifel Financial and Andrew Davis at T. Rowe Price Group, both in Baltimore. And Delta, American Airlines Group and Southwest Airlines each will boost quarterly dividends this year, according to data compiled by Bloomberg.

None of the airlines would comment ahead of upcoming earnings releases.

Delta said in its Dec 11 investor day it will return at least US$1.5 billion in 2015 to shareholders. In April, the board will consider renewals of its dividend and share buybacks, the company said.

Fuel has been the largest expense for airlines, accounting for as much as one-third of total operating costs. The six largest US carriers spent US$32 billion on fuel during the first nine months of 2014, according to data from the companies.

Even with jet kerosene down 50 per cent since the end of 2013, strong travel demand means fares aren't likely to drop significantly, according to a Bloomberg survey of six analysts. Wolfe Research's Hunter Keay projects that fuel staying at less than US$2 a gallon would save US carriers US$14 billion this year.

"Fares are never a cost pass-through," said Savanthi Syth, a Raymond James Financial Inc analyst in St. Petersburg, Florida. "When fuel prices were going up a lot in 2008, airlines weren't able to capture those increases because demand wasn't there. It's the same here. At the end of the day, demand will dictate what pricing does."

Passengers in markets including the Asia-Pacific region and Latin America may pay a bit less in 2015 because of waning demand or currency fluctuations, analysts said. In the US, fares may fall in one or two areas of increased competition such as Seattle, where Delta is boosting capacity to feed an overseas gateway, and Dallas, where discounter Southwest is adding flights and trimming fares at Love Field airport.

"You're seeing some competitive fares in some spots, but in aggregate I'd say the US is probably the best market," said Mr Davis of T. Rowe Price, which owns shares of American, Delta and United Continental Holdings Inc, according to data compiled by Bloomberg.

The 11-company Bloomberg US Airlines Index more than tripled from the start of 2013 through 2014 before slipping 6.7 per cent this year through yesterday.

Jet fuel fell to US$1.56 a gallon on Thursday in New York, the lowest since May 2009 - less than the US$2 benchmark in the savings estimate by Wolfe Research's Keay, who is based in New York.

Airline executives holding the line on fares are bracing for the inevitable: a rebound in the price of oil, Mr Denardi said. They view crude at US$50 a barrel - and West Texas Intermediate traded at US$47.38 on Friday in New York - as unsustainable, he said.

Not all analysts agree that consumers will gain little from reduced spending for fuel. William Greene at New York-based Morgan Stanley expects airlines to return about 75 per cent of the benefit to customers through aggressive pricing, "marginal" capacity additions and lower fuel surcharges.

Still, Mr Greene said in a Jan. 12 report that airlines' top priority will be debt reduction and buybacks. He declined to be interviewed.

"For the longest time, these guys lost a lot of money and now, through consolidation and pricing and capacity discipline, they are starting to make a lot of money," Mr Lowrance said. "I think they prefer making money. These are for-profit companies."