Barclays on U.S. Airlines: Fuel at it Again, but Industry Adapting

Barclays on U.S. Airlines: Fuel at it Again, but Industry Adapting

Barclays analyst says, "Fuel continues to rise, creating downside in the earnings outlook for the second and third quarters, at least relative to a stale consensus. Despite these near-term challenges, we continue to believe that a combination of demand recovery, fare activity, and capacity reductions will restore industry earnings power by year-end 2011. We expect to hear more about the strength of the revenue environment and scope of capacity reductions during the upcoming earnings season, but the volatility of fuel makes it hard to interpret how the market will greet those disclosures. In the near-term, the market is likely to remain frustrated with the industry's inability to provide instant fuel offset gratification, but the industry is adapting; our bullish views rest on the industry's consistent ability to offset material fuel increases over time (see our slide deck titled "The New Fuel Reality and its Implications for Airline Equities" published on 2/14/11). Top picks remain United Continental (NYSE: UAL), Delta (NYSE: DAL), and AMR Corp (NYSE: AMR)."

"Fuel is at it again - Despite multiple revisions for fuel during the course of this quarter (last one six weeks ago), we must again revisit our earnings assumptions to reflect higher fuel as 1Q earnings approach. We now assume jet fuel at $3.20 and $3.35 per gallon in 2011 and 2012, up from $3.07 and $3.19 previously."

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