Recession Worries Drive Down Airline Stocks
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Last Updated: April 23, 2008
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Shares in US airlines fell on Wednesday, with Northwest Airlines and Alaska Air Group dropping more than 10 percent, after JP Morgan cut its ratings on those carriers and several others due to recession concerns.
 "Even a best-ever recessionary demand scenario results in a $4 billion industry loss," JP Morgan analyst Jamie Baker said in a note. "And if demand trends mirror prior recessions, a $9 billion loss can't be ruled out," he added. "In that scenario, cash becomes scarce for many." The Amex airline index fell 5.8 percent to its lowest levels
in more than five years.
In addition to a potential US recession, airlines face soaring oil prices,
which have recently been setting record highs and leading to increased jet
fuel costs. While a downturn in the US economy typically depresses oil
prices, that is not a given this time with countries such as China and India
booming. "More likely, in our view, is that oil sits tight but
revenue trends reverse," said Baker, who expects to see signs of softer
demand starting in the second quarter. The airline industry is expected
to spend $25 billion more on jet fuel this year than it did in 2002, swamping
the $7 billion in staff savings squeezed out during the past few years, JP
Morgan said.
The broker lowered its ratings and slashed 2008 earnings estimates on
airlines, including American Airlines parent AMR, Delta Air Lines, Continental
Airlines and US Airways.
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