UBS Investment Research analysts today wrote about more disturbing airline demand trends, but did not suggest the sky is falling. [more]
"Domestic capacity cuts are barely offsetting demand deterioration but international markets are troublingly weak," they wrote in a research note. Yet, they added that "the U.S. airline stocks are priced to reflect an excessively weak 2009 and embedded in expectations is another liquidity crisis. On our revised forecasts we do not foresee such a crisis coming."
UBS revised forecasts include lower 2009 earnings per share estimates for parent companies of American Airlines, Continental Airlines, JetBlue Airways and United Airlines, but higher EPS targets for parents of AirTran Airways, Alaska Airlines, Delta Air Lines, Southwest Airlines and US Airways. In all cases except JetBlue's, UBS is predicting lower or much lower passenger revenue this year versus last year, and revised downward industry unit revenue expectations for 2009, to a 4 percent to 6 percent reduction from a previously forecast 1 percent reduction.
"International markets are particularly exposed to this downturn and are likely to continue to display weaker revenue trends than domestic markets," according to today's note. The analysts pointed out that it is more difficult to cut international capacity given fewer frequencies and "mission specific" aircraft assigned to international routes, and referenced the "rolling off" of fuel surcharges. "Where surcharges are rolled into fares corporate discounts will be applied and will reduce yield (corporate discounts typically apply to published fares and not to fuel surcharges)," they wrote.
Despite such negativity around revenue trends, UBS concluded that "the profit outlook should improve dramatically thereafter." J.P. Morgan analysts last month expressed a similar sentiment
, writing that the U.S. airline industry still is positioned for a decent 2009 even if demand weakens beyond their expectations.