Airlines can expect lower earnings in light of declining revenues per available seat mile (RASM) and higher fuel costs in the wake of Hurricane Harvey, predicts UBS Global Research. The analyst noted that airline stocks have sold off 20 percent in the last six weeks based on worsening revenue and more competitive pricing “rhetoric.”
UBS said the worsening trend was moving it to reduce its 2017-2018 earnings per share estimates for U.S. airlines by 10 percent, with most of the decline coming from anticipated higher fuel costs. But it also said that legacy carriers were engaged in “strategic discounting” to “discourage ultra-low-cost carrier (ULCC) growth.”
Fuel cost assumptions for the fourth quarter were expected to jump by 20 cents per gallon at most major U.S. carriers, save Southwest, which has consistently paid higher prices throughout the year. The average price carriers pay per gallon is expected to average $1.89 by the fourth quarter. However, UBS said, “While Q3 PRASM [passenger revenue per available seat mile] outlook has worsened since mid/late July, we don't think the underlying supply or demand trends have changed since then, meaning RASM could bounce back fairly rapidly.”
Preliminary estimates of air service disruption costs in Houston during Harvey from just three carriers—United, Southwest and Spirit—topped $353 million.
