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A Clear & Present Danger to the Airline Industry – The Obama White
House
By Vaughn Cordle, CFA / February 19, 2009
The fees and taxes collected by the FAA Trust Fund could be 10% lower in 2009, which will widen the
negative gap between trust income and outlays.
The stimulus package will boost airline revenue, as do lower energy costs for the consumer (more
disposable income). If our numbers are correct, both factors will offset 6% or so of the 15% revenue hit we
estimate for the passenger industry this year. In other words, the net result will be that industry revenue falls
by approximately 9% or $12.4 billion for all (41) passenger airlines, and $10.8 billion for the top 10.
We estimate that the airline sector could be the most profitable sector in the US given its high leverage to oil
prices and jet fuel costs, even if that profit is inadequate to (1) repair the balance sheet, (2) invest in new
aircraft, (3) meet the upcoming environmental costs, and (4) satisfy the demands of labor. Labor will want
to recoup some of the $19 billion (40%) in lower wages/benefits and the increased productivity it
relinquished since the last contract cycle.
The $3- $4 billion or so in profits (excluding non-operating charges) we estimate this year will result in
inadequate earnings relative to the industry's weighted average cost of capital, and it will take $23 billion of
retained earnings to fix the industry's balance sheet.
Bottom Line: At some point the Obama White House will be looking to raise taxes and fees to support a $2
trillion budget deficit. The profitability of the airline industry could make it a convenient cash cow—ready to
be milked. This is a clear and present (political) threat that must be nipped in the bud before Obama's team
gets its act together and attempts to push through higher taxes/fees.
If our estimates are correct, the industry's GAAP earnings (mid-point of a range) breakeven is $59 oil and
$74 oil in terms of free cash flow. The breakeven on lost revenue equates to $30 per barrel. In other words,
approximately $10.8 billion in lost revenue is offset by oil prices falling by $30. In contrast with the oil
average of $100 for 2008, we are now modeling $50 for 2009.
©Copyright 2009 AirlineForecasts, LLC All Rights Reserved
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