In reaction to surging fuel costs, several major airlines announced today that they were raising their fares in order to recoup some of their rapidly increasing flying costs.
The increase this time around is $20 and effects passengers traveling on UAL Corporation (NASDAQ: UAUA), Delta Air Lines, Inc. (NYSE: DAL), and AMR Corporation (NYSE: AMR)'s American Airlines. The $20 jump in prices will be added to the airline's fuel surcharges, and consequently, these charges are now running at $130 round trip on most flights that you will book through the airlines.
The current rate hike was first initiated by Delta, and marks the second time in just over a week that the airline has been forced to raise fares in order to combat record high fuel costs. Times are definitely tough for airlines, and they are doing everything they can to combat fuel prices, but regardless of the rate increases most analysts are still expecting to see huge losses this year from most, if not all, airline carriers.
Oppenheimer downgraded shares of Chelsea Therapeutics (NASDAQ:CHTP) to Perform from Outperform after their survey suggested physicians believe currently available generic treatments are adequate in neurogenic orthostatic hypotension, which could impact the company's lead drug Droxidopa.
Clearwire (NASDAQ:CLWR) was cut to Sell from Hold at Citigroup on valuation, as they estimate fair value at $13.
OTHER DOWNGRADES:
Goldman downgraded Kellogg (NYSE:K) to Neutral from Buy and Hershey Foods (NYSE:HSY) to Sell from Neutral.
TheStreet.com's Jim Cramer says they can't be profitable with this huge cost – it's time to move on.
Here's a revelation. The airline industry is disappearing right before our eyes. And it doesn't even matter. They can merge all they want, they can try to cut costs through synergy, but the business can't survive $120 oil. The variable cost is 35% of their expense. That's not tenable and it is going higher. Fares have to double to make it up. That's just not tenable. The Dreamliner's a nice savings, but this American industry won't get there in time to be saved by it.
Last week we saw the big give-up, the departure of even the longest-term investors. The stocks are signaling that most of them will have to restructure through bankruptcy. They have done it before, but this time it doesn't matter. The fare increases have to occur, and they are such that the airline structures can't be profitable. It is one of those industries that can't stay afloat without massive federal subsidies, and that can't happen.
I have hated the airline stocks ever since 1985 when I recommended Delta (NYSE: DAL) (Cramer's Take) and my clients promptly dropped 50%. I reiterate that after the tremendous declines these stocks have, they are still worth avoiding. Don't be tempted to pick up these stocks if oil "swoons" down to $115. The airlines will rally, but they will need to do every bit of financing possible if a rally occurs.
Eos was an improbably candidate for success in the airline industry. It flew one route, from New York's JFK to London. It was an all-business-class carrier.
Now, Eos is bankrupt. Having only one route, added to the rising price of jet fuel, cut the carrier down.
The news raises the question, once again, whether small and large airlines alike can make it though the current increase in fuel prices and a recession without having to file for Chapter 11. It was only four years ago that most U.S. carriers had to seek protection in the courts. AMR (NYSE: AMR) was one exception. That hurts it now because it did not use bankruptcy to cut its debt and the costs of its workforce. That may make it the most likely candidate of any American carrier to hit the air pocket of insolvency.
The oil price crisis my be so bad that, coupled with falling passenger revenue in a sharp and prolonged downturn, even mergers like the one planned by Delta (NYSE: DAL) and Northwest (NYSE: NWA) will not save them.
That will leave the banks, who hold most of the debt on airline balance sheets, holding the bag.
Douglas A. McIntyre is an editor at 247wallst.com.
MOST NOTEWORTHY: Wright Medical, Atlas America and Delta Air Lines were today's noteworthy upgrades:
JP Morgan upgraded Wright Medical (NASDAQ: WMGI) to overweight from neutral citing company specific momentum and the increasingly favorable orthopedic industry backdrop.
Atlas America (NASDAQ: ATLS) was raised to outperform from market perform at Friedman Billings citing valuation and outlook for its upstream MLP.
Credit Suisse upgraded Delta Air Lines (NYSE: DAL) to Outperform from Neutral citing valuation and capacity cuts. The firm also upgraded Northwest Airlines (NYSE: NWA) to outperform from neutral.
According to people familiar with the matter, the Wall Street Journal reported that home-furnishings retailer Linens 'n Things, acquired by Apollo Management in 2006 and caught by a shrinking housing market and increasing debt load, is expected to file for Chapter 11 bankruptcy-court protection by Tuesday.
The United Auto Workers union notified General Motors Corporation (NYSE: GM) of its deadline to strike three factories in Michigan if the two are unable to agree on local labor pacts, the Detroit News reported.
The Business Standard reported that Toyota Motor Corporation (NYSE: TM) is planning to invest Rs 1,400 crore in Toyota Kirloskar Motor, its India subsidiary to set up its second plant in the country.
It's not bad enough that air travelers are facing more and more delays, and airlines are canceling more and flights, but along comes airplane maker Boeing (NYSE:BA) announcing that its 787 Dreamliner is going to face a delay of at least 14 months until deliveries are made.
According to the AP report: "The Times of London reported on its Web site late Wednesday, quoting those familiar with the matter who asked not to be identified, that delays for 787 could reach 18 months, while the Seattle Post-Intelligencer put the delay at 14 months from the original goal."
What's with this industry? Why can't anything be on time?
With three airlines going bankrupt in the last week alone, the industry is a mess. It's no wonder Boeing announced the delay because it needs to really make sure that the plane is sound structurally. The Seattle Times had a story about airline woes and reported: "American, Delta and United airlines recently canceled flights to perform unscheduled inspections of certain aircraft, and US Airways found problems on some Boeing 757s after a wing part on one of its planes fell off during a flight."
With the busy summer travel season fast approaching, travelers better plan for even more delays.
Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 4/9/08.
The on again, off again merger talks between Delta (NYSE: DAL) and Northwest (NYSE: NWA) have started again according to the Financial Times. They are being driven by an up-turn in fuel costs and a potential down-turn in traffic. The pilot's union, which had blocked earlier attempts at a merger, may be left on the sidelines for now. The boards of the two companies believe that they are bargaining for the survival of their respective companies.
While the last set of talks broke down in February, according to the FT, "Executives at Minnesota-based Northwest have since put pressure on their counterparts at Delta to proceed without the pilots' support."
A merger will not help with fuel costs and unions are not likely to give in to job cuts, raising the issue of strikes. Yet the big airlines feel that they must act even if it only saves them a dime. Most of the large airlines have big debt loads and falling cash-flow. Mergers often cause problems with customer service while the parties try to mesh their reservations systems and IT.
If fuel costs keep marching up and a deep recession keeps people off planes, Northwest and Delta can go into Chapter 11 as a combined company instead of separately.
Douglas A. McIntyre is an editor at 247wallst.com.
If you have a trip planned on United Air Lines, Inc. (NASDAQ: UAUA) over the next couple of days, you may want to call ahead and verify that your flight is still on schedule. According to news reports today, the airline is going to be performing comprehensive inspections of 52 of its 777 aircraft.
Air travelers have been dealing with delays for the past week as all the major airlines are working to get all their planes inspected and given the "all clear" by the FCC. Last week, we saw major cancellations and delays for travelers flying American Airlines (NYSE: AMR) and Delta (NYSE: DAL) as those two carriers were having scores of planes inspected for potential problems with their wiring bundles.
The United inspections are looking at the fire suppression system in the cargo bays. The company wants to make sure that this system is working correctly, and notified authorities when it discovered that one of the five bottles in the suppression system was skipped over during the last inspection of the system.
Northwest (NYSE: NWA) does not care what the pilots' union thinks. It plans to go ahead with a merger with Delta (NYSE: DAL) despite resistance from the sky captains. Pilots have held up a deal while they negotiate seniority provisions for a combined company.
According to The Wall Street Journal (subscription required), "a jump-started deal wouldn't include terms of a combined pilot labor agreement and the salary enhancements previously foreseen."
Aside from regulatory approval, the deal has two real problems. The first and most obvious is that the pilots may strike the airlines if they feel they have been mistreated. A shutdown, especially if it is prolonged, could cost tens of million of dollars in lost passenger revenue.
In addition, it is not clear that merging airlines has a clear benefit. Fuel costs do not change. The number of employees may fall, but some of the unions involved may ask for higher compensation in exchange for supporting cuts. Customer service department mergers almost always cause problems because putting together incompatible reservations platforms can take several quarters. This can damage relationships with consumers and cause them to use other carriers.
Pushing the merger may be a bad idea, whether the pilots are on board or not.
Douglas A. McIntyre is an editor at 247wallst.com.
For anyone who has plans to fly on American Airlines, AMR Corp (NYSE: AMR) or Delta (NYSE: DAL) today, you may want to call ahead and verify that your flights are still taking off as planned, as both airlines are canceling hundreds of scheduled flights today.
Both carriers are grounding a large number of flights as they continue to hold inspections on wiring bundles on some of their planes. For American, the company is planning to ground 132 of its flights today, while Delta is canceling 275 flights.
The Federal Aviation Administration is in the middle of a massive inspection project, in which it stated that it will be inspecting 10 safety orders (also known as airworthiness directives) at every single major airline by March 28. This comes after a scandal broke out over missed inspections at Southwest Airlines (NYSE: LUV) earlier this year.
MOST NOTEWORTHY: The airline sector, Siemens and Internap were today's noteworthy downgrades:
Lehman downgraded the airline sector to Neutral from Positive, citing higher fuel costs and the weakening economy. AirTran (NYSE: AAI) and U.S. Airways (NYSE: LCC) were downgraded to Equal Weight from Overweight. UBS said it can no longer recommend airline stocks due to weakening economy, high fuel prices, and less likely industry consolidation. The firm downgraded Continental Airlines (NYSE: CAL), Delta Air Lines (NYSE: DAL), Northwest Airlines (NYSE: NWA) and U.S. Airways to Neutral from Buy.
Goldman removed shares of Siemens (NYSE: SI) from their Conviction Buy List as they believe the company may book additional charges of $1.2B this year.
Jefferies cut Internap (NASDAQ: INAP) to Underperform from Buy as they believe the 10-K filing delay and revenue quality questions reduce visibility into the health of the business.
OTHER DOWNGRADES:
Wachovia lowered Amgen (NASDAQ: AMGN) to Market Perform from Outperform.
SI International (NASDAQ: SINT) was downgraded to Neutral from Outperform at Cowen.
Delta (NYSE:DAL) offered buy-outs to 30,000 employees in the hopes that at least 2,000 of them will leave. The company will also cut the number of routes that it flies. According toThe Wall Street Journal "the airline was forced to take further cuts because fuel prices have risen nearly 20% over the past three months, increasing its fuel bill for this year by nearly $900 million."
Delta's plan is now old news What is not is that all of the major carriers here and abroad are going to have to make similar moves, putting tens of thousands of airline workers out of work. AMR (NYSE:AMR), the parent of American Airlines, says its fuel bill could be up $4 billion this year.
The airline industry may be headed toward another set of bankruptcies. Most of the large carriers have razor thin margins and plenty of debt service. There will now be a race of cost cutting against the effect of the recession on traffic and oil prices on margins.
The airline industry has very few outs. If carriers cut too many routes, they open themselves up to competition. If they cut too few, they may have a cost base which they cannot support. That leaves chopping employees as the only way to save a lot of money.
The news of more buy-outs and lay-off is coming, and coming very soon.
Douglas A. McIntyre is an editor at 247wallst.com.
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