Transcripts

Airline Stocks Rise as Crude Oil Prices Fall

PAUL KANGAS: Crude oil prices fell sharply today on the heels of a stronger U.S. dollar. Light sweet crude for July closed at $128.85 a barrel, down $3.34 in New York trading. Those lower oil prices gave airline stocks a much needed lift today. But, as Suzanne Pratt reports, experts say the U.S. airline industry still faces a cloudy future.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: For most major U.S. airlines, the skies are hardly friendly these days. Not only are surging fuel prices taking a massive bite out of bottom lines, but the weakening U.S. economy is creating new revenue worries. Airline experts forecast huge quarterly losses for major carriers this summer, typically the busiest and strongest period for airlines. Standard & Poor's analyst Jim Corridore says bankruptcies may be imminent.

JIM CORRIDORE, AIRLINE ANALYST, STANDARD & POOR'S: If oil stays at or near $130 and continues to rise, we will see more bankruptcies in the airline industry, I think. I think that airlines are now back in a battle of survival. It's who can last the longest until we see some kind of fundamental change in the industry.

PRATT: Industry woes are well reflected in the stocks of most U.S. airlines. Since the beginning of this year, the Amex airline index is off nearly 50 percent. The index tracks shares of many large and small U.S. carriers. Jet fuel represents 30 to 40 percent of an airline's cost structure, so none are immune to the impact of higher oil prices. But U.S. Airways is considered most at risk for bankruptcy, while some analysts believe Continental is in the best position to ride out current turbulence.

CORRIDORE: I just think that Continental has less debt relative to the rest of the industry. They do get more business travelers, which allows them to get a revenue premium versus their peers. And I think their management team has a pretty good strategy in terms of growing internationally, cutting domestically.

PRATT: For other carriers, a merger may be the only option to both avoid bankruptcy and reduce capacity in the market. Last month, Delta and Northwest announced plans to get hitched. United and U.S. Airways are considered another likely pairing. Still, Morningstar analyst Brian Nelson says investors should be wary of airline stocks.

BRIAN NELSON, SR. AIRLINE ANALYST, MORNINGSTAR: We think the airline industry is one of the worst industries out there under our coverage universe and we think long-term investors should steer clear of this industry, particularly as it stares down unprecedented crude oil price levels, as well as a potential severe downturn in travel demand.

PRATT: Because of the open skies treaty, U.S. airlines will also be coping with increased competition from European carriers. That's one more negative for an industry that may already be in a nosedive. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.

SUSIE GHARIB: There was new evidence of that weakness late today. In light of high jet fuel prices, American Airlines announced the first round of reductions to its flight schedule. American plans to restructure its operations in San Juan, Puerto Rico beginning in September. It will also cut routes from Chicago to Buenos Aires and Honolulu. Parent company AMR says there will be group cuts in other markets as it slashes domestic capacity 11 to 12 percent by year's end.