The news contained in a press release from the International Air Transport Association (IATA) today was largely negative, detailing how a European financial meltdown could seriously damage profitability for the entire industry.
However, while the group rolled back 2012 profit predictions, their relatively rosy outlook for North American carriers helped push several airline stocks higher.
Concerns About Europe Crashing and Burning
For anyone keeping a tally on new ways the debt crisis in Europe might ripple across the global economy, the IATA press release gave you another one to mark down. The release amended previous profit forecasts for 2012 from $4.9 billion to $3.5 billion with profit margins falling to 0.6 percent. While the 2011 projections remained steady at $6.9 billion for the year, concerns about a depressed market for flights in Europe is clearly a major concern. “The biggest risk facing airline profitability over the next year is the economic turmoil that would result from a failure of governments to resolve the Eurozone sovereign debt crisis. Such an outcome could lead to losses of over $8 billion—the largest since the 2008 financial crisis,” said Tony Tyler, IATA’s Director General and CEO.
North American Fliers See Blue(r) Skies
While the outlook for the global market was clearly negative, the IATA’s assessment of the future for North American fliers helped push up several airline stocks. The IATA release states that “North American carriers are in a much more benign environment. They have seen yield and load factor improvements as a result of tight capacity management, which has improved profitability to $2.0 billion (up from the previously forecast $1.5 billion). The US economy has also grown at a faster pace than Europe. This gives the region the strongest EBIT margin of 3.2%.” The uptick in the profit forecasts for 2011 clearly caught the eye of investors as several major airlines made gains. US Airways Group, Inc. (LCC) gained over 4.5 percent, while Spirit Airlines Incorporated (SAVE) gained over 2.3 percent and United Continental Holdings, Inc. (UAL) gained over 1.8 percent. Discount and regional airlines appeared to fare even better, with JetBlue Airways Corporation (JBLU) gaining over 5 percent and Republic Airways Holdings Inc. (RJET) jumping over 6 percent.
American Shares Jump
The biggest gainer amongst airline stocks, though, was AMR Corporation (AMR), the holding company that owns American Airlines. Share leapt over 60 percent in value in early trading before sliding off slightly in the afternoon to a gain of just under 55 percent. This comes after American declared bankruptcy on November 29th, a move that caused shares to gap down over 80 percent that day. Now, American shares are in the midst of a strong two day rally, gaining over 180 percent since market close Friday. The reasons for the major upward swing aren’t entirely clear. Rumors persist about US Airways making plans to buy the ailing American airlines, but there’s nothing concrete as of yet. There’s also the possibility that shares are simply following a trajectory that’s sometimes common to major bankruptcies.
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