Airlines See Ray of Light, Even Through the Ash Cloud

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April 22, 2010

If the first quarter’s fiscal results along with March’s traffic reports are any indication, airlines may finally be investment-worthy again.

Delta kicked things off this week with a by reporting a quarterly loss of $256 million (or -$0.23 per share) – the smallest one in while. Revenue was up 2% as well, on strengthening business travel. Better still, actual earnings in the current quarter are anticipated to be positive, at $0.65 per share.

Not just Delta: Were it just Delta’s better numbers, it may be amiss to generalize industry trends. It’s not just Delta though… the green shoots are finally appearing in the blue skies too.

JetBlue (JBLU) said March’s traffic was up 9.2%. Southwest (LUV) much better than the $91 million loss in last year’s first quarter, which was much better than the $91 million loss taken in last year’s first quarter.

Even American Airlines’ parent company AMR Corp. (AMR) – despite no real progress towards shrinking its habitual losses – saw a 4.7% increase in revenue on about a 1% increase in traffic. And, like Delta, AMR is expected to turn a profit by the second or third quarter.

No, it’s not jaw-droppingly strong, but the numbers are undeniably bigger despite higher fuel costs in the meantime.

The impact of gray skies over Europe: What about the volcanic ash that shut down air travel over the better part of Europe for the last week? Estimates suggest the no-fly decision cost(s) the industry about $250 million per day in lost revenue. However, the impact is more severe for European carriers than U.S.-based airlines. In fact, most U.S. airlines will likely end up viewing the flight cancellations as a mere annoyance, but not catastrophic to their bottom lines.

Delta may feel the shut-down’s most adverse effects among U.S. carriers, as 22% of its revenue is fueled by European service; those trans-Atlantic flights represent about $5 million in revenue per day for the carrier. Even so, with flights already resumed, the four-day shutdown has only cost Delta between $20 and $25 million.

For comparison, weather-based cancellations in February cost the airline $65 million, yet Q1 was still one of the best quarters Delta has seen in some time.

Locally devastating: In that light, the ash-related hysteria that drove so many U.S. airline stocks lower may actually be an opportunistic ‘excess selling’ error made by the market. European airlines are a different story though.

British Airways (BAY), for instance, says it’s losing about 20 million pounds ($30 million) per day because of the ban on flying. Given the company’s annual revenue of 7.8 billion pounds, several days’ worth of cancelled flights will be more apparent on its top and bottom lines.

Bottom line: The ash-related cancellations will impact second quarter’s numbers to some degree (yet various degrees), but the bigger trends will prevail as the volcano’s disruption-power dissipates. In six months - or even less - the shut-down will barely be a faded memory, once vacation travel revenue starts to flow, and Delta and AMR post positive earnings.

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