Airline stocks have tumbled nearly 14 percent the last five months as high oil prices have raised jet-fuel bills and air travel has been hurt by political turmoil and natural disasters.
The International Air Transport Association this week slashed its profit forecast for airlines worldwide this year by 54 percent, to $4 billion from the $8.6 billion it forecast in March. Industry profits will be down 78 percent from last year's $18 billion, chiefly due to high fuel.
"That we are making any money at all in a year with this combination of unprecedented shocks is a result of a very fragile balance," IATA chief executive Giovanni Bisignani said.
The reasons are known: the tsunami and nuclear disaster in Japan, unrest in the Middle East and North Africa, the sharp rise in oil prices.
Still, 2011 will not be another 2008 for airlines, when a surge in oil prices sent some carriers to near-bankruptcy.
It's a leaner industry. Airlines made lasting changes after the peak of $147 a barrel for oil in summer 2008 and the financial collapse on Wall Street. They cut capacity, with fewer seats and flights; improved their balance sheets; and added fees for checked bags, pillows, priority boarding, and seats with extra legroom.
Also, there is less competition since Delta and Northwest merged, United and Continental merged, and Southwest Airline acquired AirTran.
"Industry fundamentals are broadly stronger than in the rising-fuel-price period of 2008," Soleil Securities analyst James Higgins said in a recent note. "Coming quarters will produce evidence that most carriers are stronger, have a greater ability to offset higher fuel prices, and represent better value than is expected."
Still, investors are skittish and airline shares, as a group, are down 13.7 percent this year, while the Standard & Poor's 500 index is up 2.5 percent.
"We think some investors could be overreacting," Wolfe Trahan & Co. analyst Hunter Keay said in a recent report. Passenger-demand trends into the summer and beyond remain strong, based on "bullish and optimistic" comments by airline executives at a recent transportation conference, according to Keay.
In Japan, the "situation appears to be stabilizing," Keay wrote.
Rising jet-fuel prices are the main reason for weaker profits, with benchmark Brent crude expected to average $110 a barrel during 2011, a 15 percent increase from the $96 previously forecast.
At $3 a gallon, U.S. airlines' jet-fuel bill will be $54 billion in 2011, up from $39 billion last year, a U.S. trade group said.
The fuel spike is substantially different from 2008's. While oil inventories are low, there is "substantial" spare capacity among the Organization of Petroleum Exporting Countries and refineries, which was not the case three years ago, IATA said. In addition, the monetary expansion that fueled a surge in financial investments in commodities is ending, which will remove a major upward pressure on fuel prices.
"In 2001, we needed oil below $25 a barrel to be profitable," Bisignani said. "Today, we are looking at a small profit with oil at $110 per barrel." Fuel now accounts for 30 percent of airline costs, up from 13 percent in 2001.
Airlines have passed along higher fuel prices by raising fares. That's beginning to dissuade some from flying. The number of price-sensitive leisure travelers fell 3 percent to 4 percent the last five months as travel costs were forced higher by fuel prices and, in Europe, by new passenger taxes, IATA said.
Traffic in May for the first airlines reporting - US Airways Group and IAG International Airlines Group, comprising British Airways and Iberia Airlines - was similar in strength to April, said Ray Neidl, analyst for the investment bank Maxim Group L.L.C.
"Both domestically and globally, demand and revenue trends remain very strong despite increased economic concerns," Neidl said in a client note. "We expect these results to continue at least through the busy summer period."
He said he assumed economic growth would slow in the second half of the year, oil prices would stabilize between $90 and $110, and airlines would continue to carefully manage seat capacity and planes in the air.
Although government data released last Friday showed the U.S. economy wasn't growing as fast as had been expected, May passenger traffic for U.S. airlines did "not reflect a slowing," Avondale Partners analyst Bob McAdoo said in a note.
A barrel of oil in May cost $9 less than in April. "With oil at these levels, we continue to forecast solid earnings for Delta, United Continental Holdings, and US Airways," McAdoo wrote.