U.S. airlines poised for profits but face headwinds

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By Kyle Peterson

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Airlines are seen mostly profitable for the second quarter when the earnings reports start rolling in on Wednesday.

Experts say they are mostly optimistic about the industry outlook although shares of major U.S. airlines fell to one-year lows on Monday amid worries in the market that economic weakness could slow travel demand in the fall.

"Possible mild economic turbulence for the economy in the second half of the year may test airlines on cost cutting measures and capacity restraints taken," said Ray Neidl, a senior aerospace analyst with Maxim Group, in a research note.

"Much of this uncertainty should already be reflected in airline stock prices," Neidl said. "We believe that despite challenges, the long term outlook looks solid for the industry."

The Arca airline index <.XAL> slipped 1 percent during the second quarter, while the price of crude oil, which influences jet fuel costs, fell 10 percent but remained historically high.

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The U.S. economy, meanwhile, is not signaling a strong pick-up with the unemployment rate at 9.2 percent in June.

AMR Corp <AMR.N>, parent of American Airlines, leads off the earnings season on Wednesday and is expected to be the only major airline in the top five to post a loss for the quarter, according to Thomson Reuters I/B/E/S.

United Continental Holdings <UAL.N> and US Airways Group <LCC.N> were seen posting profits on Thursday.

Airlines shares were broadly weaker on Monday, with United down 3.5 percent at $20.12 on the New York Stock Exchange. Delta Air Lines <DAL.N> down 4.75 percent at $8.01. AMR shares were down 3.39 percent at $4.84.

Morningstar equity analyst Basili Alukos said concerns that the U.S. Congress will not reach a deal to raise the debt ceiling is weighing on airline shares as much as other sectors.

Republicans and Democrats scrambled on Monday to work out details on a fallback plan that would avoid an unprecedented U.S. default.

"If the debt ceiling isn't raised, the airlines will see a substantial rise in interest rates and interest costs, making the firms less valuable," Alukos said.

He said new signs that recent fare hikes are unsustainable could weaken the outlook somewhat.

"Higher prices would cause consumers to think twice. So I think you're going to see a lot of talk about pricing," Alukos said. "My thought is you'll see some disintegration in their ability to maintain pricing and that prices will probably have come down a little bit."

Helane Becker, an airline analyst with Dahlman Rose & Co, agreed saying airlines could see volatile bookings patterns, but that carriers in the U.S. have managed their capacity well in recent years and are prepared to deal with demand fluxuations.

"They are much better prepared than they have ever been in the past," Becker said. "But they're still airlines. And I definitely think that they are going to continue to be volatile."

(Reporting by Kyle Peterson, editing by Bernard Orr)