The oil surge, which gives new indications daily that it's evolving into the world's third oil shock, bodes tougher times for airlines, and travelers alike, many analysts agree.
Moreover, those tougher times may propel "creative and avant-garde" ideas and strategies to cope with the more-challenging flying environment, by both airlines and travelers, so says C. Leonard Bauer, independent stock analyst.
American Airlines (NYSE: AMR) took the first, bold - - and controversial - - step in the 'era of new flying rules' by announcing that it would charge passengers $15 each way to check their first bag, The Dallas Morning News reported. American also reduced its flying schedule by 11-12% at the same time.
Bauer said travelers should brace for more a-la-carte changes from the major carriers, and some truly creative ones, at that. "The airlines will be looking at every way to reduce fuel usage and cover those expenses from added weight," Bauer said, "When oil was at $20 a barrel, weight was a cost factor, but now at more than $125 a barrel, it's a going-concern factor. These high fuel costs can and will force some airlines out of business if they can't recover these costs. 'Light flight' is in." Bauer added that he does not have a rating on nor own shares of any airline.
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.
In the airline industry, it seems that any deal will do. Northwest Airlines Corp. (NYSE: NWA) is already fairly far along in discussions about merging with Delta Air Lines Inc. (NYSE: DAL). Now UAL Corp.'s (NASDAQ: UAUA) United Airlines is talking with Continental Airlines Inc. (NYSE: CAL). But one set of negotiations in not enough for Continental. It is also talking to AMR Corp.'s (NYSE: AMR) American Airlines, according to The Wall Street Journal (subscription required). The paper reports "the talks were exploratory, and it isn't clear they will go further."
Airlines are seeking mergers under the premise that combining companies saves costs. While that is true to some extent, the marriages also hurt customer service -- badly. Putting together incompatible reservations and service operations can take years and be extremely complex, which can make it hell for consumers who just want to take an airplane ride from here to there. Bad customer service is a sure way to drive off fliers, and that is not good for revenue.
The savings in a merger also might not be as great as imagined. Fuel costs stay the same. The number of pilots and crews may drop some, but that can also cause labor disputes and strikes that interrupt service. The number of people needed to handle customer support and processing of reservations probably cannot be cut by much, especially if retaining revenue with unhappy fliers is important.
In an industry where mergers and Chapter 11 filings have been part of the landscape for decades, combining airlines may be no panacea. It is good to remember that the two most successful carriers in the United States, American and Southwest Airlines Corp. (NYSE: LUV) have never been much enamored of merging.
Douglas A. McIntyre is an editor at 247wallst.com.
Among the tumult in the markets today and the rash of quarterly reports, health care products manufacturer Johnson & Johnson (NYSE: JNJ) reported a solid quarter, and UAL Corp. (NASDAQ: UAUA), parent of United Airlines, reported that it had narrowed its loss.
Johnson & Johnson's profit increased almost 10 percent in the fourth quarter as revenues soared, despite decreasing sales for two key product lines. Net income was $2.37 billion, or 82 cents per share, up from $2.17 billion, or 74 cents per share, a year earlier. (Excluding one-time items, net income would have been 88 cents per share.) Revenues reached $15.96 billion (mostly coming from overseas), up 16.6 percent from $13.7 billion in the same quarter a year ago. Analysts surveyed by Thomson Financial had expected earnings of 86 cents per share, excluding one-time items, on revenues of $15.4 billion. For the full year, the company reported net income of $10.6 billion, or $3.63 per share, down slightly from $11.05 billion, or $3.73 per share, in 2006. J&J said it expects earnings per share for 2008 to total $4.39 to $4.44, excluding one-time items, which was in line with analysts' expectations. Shares fell 1.54 percent Tuesday, to close at $65.27.
UAL reported a less-than-expected $53 million loss for the fourth quarter on a sharp increase in the price of fuel and bad weather over the holidays. The net loss for the final three months of 2007 was 47 cents a share, better than the loss of $61 million, or 55 cents a share, in the same quarter a year ago. Revenue was $5.03 billion, up 9.7 percent from $4.59 billion a year ago, partly due to higher fares. Analysts polled by Thomson Financial had expected a loss of 89 cents per share and revenue of $4.95 billion. Despite its first loss since the first quarter of 2007, the company still posted net income of $403 million for the full year -- its first annual profit since 2000. Shares closed down 3.25 percent Tuesday, at $31.87.
CEO Glenn Tilton was mum about merger talks rumored to be under way with Delta Air Lines (NYSE: DAL).
Delta Air Lines (NYSE: DAL) Monday said it is continuing to review strategic options and that it did not expect an "immediate" sale of its regional jet service Comair, Reuters reported.
Delta's shares fell 21 cents to $13.18 in mid-day Monday trading.
Delta (NYSE: DAL) has considered a sale of Comair since exiting bankruptcy in April 2007. Along with a company restructuring and an evaluation of Comair's operation, Delta is exploring strategic options, including joint ventures or mergers.
Last fall, Delta and United Airlines (NASDAQ: UAUA) denied that they had held merger talks after a hedge fund Paradus Capital Management LP recommended that they merge.
In another bit of good news for the airline sector, UAL Corp. (NASDAQ: UAUA) said earlier today that third-quarter profit rocketed almost 76% higher on a year-over-year basis to $334 million, or $2.21 per share. Excluding items, the parent of United Airlines (the country's number-two carrier as measured by passenger traffic) would have banked $295 million, or $1.96 per share, topping Wall Street's consensus expectations by eight cents.
Revenue rose 6.8% during the reporting period to $5.53 billion. This number also exceeded the consensus outlook, which came in at $5.36 billion. Revenue per available seat mile (money earned for carrying one passenger one mile) moved 8.2% higher in the quarter.
In a statement posted by the Associated Press, UAL Chairman/CEO Glenn Tilton noted that "We delivered excellent results this quarter driven by fundamental improvements across our core business." According to Dow Jones, the company benefited by adding international flights and reducing domestic seat capacity by 4.6% on mainline routes. Increasing demand allowed for an across-the-board lift in ticket prices, which helps offset record-setting fuel costs endured by all airlines.
MOST NOTEWORTHY: Wilshire Bancorp (WIBC), American Express (AXP), AMR Corp (AMR), Delta Air Lines (DAL) and UAL Corp (UAUA) were some of today's noteworthy upgrades:
Friedman Billings upgraded shares of Wilshire Bancorp (NASDAQ: WIBC) to Market Perform from Underperform based on valuation.
Goldman Sachs upgraded shares of American Express (NYSE: AXP) to Buy from Neutral as they believe American's network business is undervalued.
UBS upgraded AMR Corp (NYSE: AMR), Delta Air Lines (NYSE: DAL) and UAL Corp (NASDAQ: UAUA) to Neutral from Reduce saying the capacity cuts bode well for industry pricing...
OTHER UPGRADES:
Wachovia raised Orbital Sciences (NYSE: ORB) to Outperform from Market Perform.
Cognos Inc (NASDAQ: COGN) was raised to Strong Buy from Outperform at JMP Securities.
It's always an interesting feat when you see an airline have some really bad news, yet its stock rallies. UAL Corp. (NASDAQ: UAUA) did just that, with its shares rising yesterday by $0.74 to $38.67 on bad news. Yesterday was a partial wipe-out travel day if you were a passenger trying to go from point A to point B in the morning on a United Airlines flight, UAL's passenger unit. The company blamed a computer malfunction for delays and cancellations of nearly 300 flights from 9:00 to 11:00 a.m. EDT. Other than "computer glitch," there were no other explanations.
Did UAL hire Johnny from 'Airplane' for the "Just Kidding!" unplugging of the radar scene? No, obviously not. But it sure goes to show just how a problem that affected JetBlue Airways Corp. (NASDAQ: JBLU) over major delays can be a PR nightmare if not handled properly. The difference is that when a problem comes up with a regional or smaller discounter it can knock the entire system out of whack for days. When there are 3,600 flights per day with UAL, the complaining is a bit more diluted and a bit less permanent.
If this turns out to be an isolated event, nobody will even remember this in a few days. Airlines do have one thing going for them: Air travel is much more of a hassle compared to pre-9/11 when you could show up 30 minutes before and get through security lines easily. There are also fewer flights with empty seats. The airlines know they can get away with close to anything now.
Just two days before, the company had given a higher forecast for airline revenues and narrowed cost projections, although it is also seeing the same trend of strong international traffic and a softening domestic market.
Jon Ogg is a partner at 24/7 Wall St.; he does not own securities in any of the companies he covers.
CBOT Holdings Inc (NYSE: BOT) was downgraded to Neutral from Outperform at Credit Suisse.
JP Morgan downgraded shares of Netflix Inc (NASDAQ: NFLX) to Underweight from Neutral, as the firm believes the company's growth will be impacted by Blockbuster Inc's (NYSE: BBI) Total Access offer.
MOST NOTEWORTHY: Cablevision Systems Corp (CVC), UAL Corp (UAUA), Abbott Laboratories (ABT), Darden Restaurants (DRI) and the food industry were today's noteworthy upgrades:
Citigroup upgraded Cablevision (NYSE: CVC) to Hold from Sell with a $36 target to reflect the Dolan's bid for the company.
Credit Suisse upgraded shares of UAL Corp (NASDAQ: UAUA) to Outperform from Neutral citing valuation and capacity reductions.
Abbott Labs (NYSE: ABT) was upgraded to Overweight from Equal Weight at Lehman Brothers citing valuation and potential upside in the pharma business.
Bear Stearns raised Darden Restaurants (NYSE: DRI) to Outperform from Peer Perform citing the announcement of the divestiture of Smokey Bones, which takes away a drag on earnings.
Wachovia upgraded the food industry to Overweight from Equal Weight, saying food companies are beginning to drive higher prices through the supply chain and yields look attractive.
MOST NOTEWORTHY: Circuit City Stores (CC), select airline stocks and General Electric (GE) were today's noteworthy downgrades:
Citigroup downgraded shares of Circuit City Stores NYSE: CC) to Hold from Buy and lowered their target to $17 from $26 following management's second guidance cut in one month; the firm thinks there is more bad news to come. The electronics-retailer was also downgraded to Market Perform from Outperform at Raymond James and to Neutral from Buy at Robinson Humphries. Circuit City was cut to Sell from Hold at Soleil.
UBS downgraded six airline stocks on fuel price concerns and their belief that demand may fall as economic growth slows in the domestic market. Downgrades are as follows: AMR Corp. (NYSE: AMR), UAL Corp. (NASDAQ: UAUA) and U.S. Airways Group (NASDAQ: LCC) were downgraded to Reduce from Buy; Southwest Airlines Co (NYSE: LUV) and Continental Airlines (NYSE: CAL) were downgraded to Neutral from Buy; JetBlue Airways Corp (NASDAQ: JBLU) was downgraded to Reduce from Neutral.
General Electric (NYSE: GE) was removed from Goldman Sachs' Americas Conviction Buy list on valuation.
OTHER DOWNGRADES:
Prudential expects Sprint Nextel Corp's (NYSE: S) company-specific problems to continue and weigh on shares and downgraded the phone-giant to Underweight from Neutral.
Banc of America downgraded shares of LSI Corp (NYSE: LSI) to Neutral from Buy.
Buckingham cut Best Buy Co (NYSE: BBY) to Neutral from Strong Buy.
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