Irrational Exuberance Over Airlines

Image: Justin Sullivan/Getty Images

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Even as the nation's network carriers began reporting billions in second-quarter losses last week, a furious rally drove share prices up by 45 to 60 percent. The market shrugged off the $1.4 billion loss reported by the parent of American Airlines, the nation's largest carrier, and ran its stock up 59 percent. The nation's second-largest airline, United, will report losses in the $3 billion range this week, yet its shares climbed 58 percent.

Why the irrational aeronautic exuberance? Last week's unprecedented decline in the price of oil, which plummeted more than $16 and closed around $130 a barrel. With fuel now accounting for about 40 percent of the airlines' costs, sharply lower oil prices surely looked like good news to the markets.

But irrational exuberance is nothing if not irrational. The biggest airlines—American, United, Delta, Northwest, Continental and US Airways—can't make money at $130 a barrel. They can't make money at $100 a barrel, either. Nor can their smaller competitors. Even the double-digit cuts in passenger capacity and triple-digit aircraft retirements planned for the fall probably won't restore profitability unless oil drops to about $80. (That's what oil sold for late last summer, the last time the big carriers were consistently profitable.) And since both business- and leisure-travel demand is falling, the price hikes and fee increases announced with metronomic regularity this spring and summer are likely to be offset by fall and winter fare sales.

"Don't you dare rain on my parade," an airline executive snapped at me Friday evening. "I want one weekend this summer when I can fantasize about not being in bankruptcy next year."

I hope he enjoyed his weekend, because that brutal reality—every U.S. carrier except Southwest Airlines faces bankruptcy and possibly even liquidation—cannot be ignored. None are sufficiently hedged against triple-digit oil prices. None can ground planes or lay off staff fast enough to keep their corporate heads above the rising tide of red ink. And there's no playbook to consult.

Think I'm being irrationally pessimistic? Tell it to Fitch Ratings, which says there could be "multiple bankruptcies and liquidation" among the major airlines next year. "The industry's current structure is unsustainable in the current fuel environment," Fitch said last week. And if you don't like analysts analyzing, listen to Virgin Group's Richard Branson, whose own worldwide airline empire is shaky. He predicts "spectacular casualties" among the big carriers in the next 12 months.

Perhaps most frightening is that no one can agree on which of the carriers are most at risk. Last Friday, for example, J.P. Morgan Chase double-jumped United shares to "overweight" from "underweight," primarily because the lead analyst thought the airline would announce a big new borrowing scheme this week along with its second-quarter loss. But just hours later, Moody's cut United's debt rating two steps to "Caa1," seven notches below investment grade.

What's the chaos mean in the long term for business travelers? To be honest, I don't know. Even 30 years of plopping myself down in seat 2B isn't particularly preparatory or enlightening. And the longer oil prices remain in triple digits, the less the lessons of the 1990 to 1995 period seem revelatory.

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