More troubling signs of lagging economy

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Two US airlines lowered earnings guidance for the year in their recent 2011 earnings calls, lending weight to concerns that the US and global economic recovery continues to lag.

Perennial profit-maker Southwest Airlines forecast that it will report a loss for the March quarter, a rarity for this company which prides itself on reporting consecutive quarterly profits year after year.

JP Morgan, in an earnings note issued late 29 March, reported that Southwest lowered its March passenger revenue per available seat mile guidance to the low-to-mid single digits. Fuel costs for the first quarter will also be higher, $3.50/gallon area vs. previous guidance of $3.35/gallon, leading to an expected first quarter loss.

JP Morgan lowered its first quarter forecast for Southwest from a profit of $0.04 per share to a loss of $0.08 per share. Consensus was a loss of $0.05 per share. JP Morgan's new estimate translates to a first quarter loss of about $63 million.

United Continental Holdings also lowered its guidance. The company is still integrating the merger of the two airlines.

"UAL guidance disappoints," JP Morgan writes. "We are widening our UAL 1Q expectation from ($0.07) to ($1.30) vs. ($0.77) consensus (though we point out a few estimate revisions already occupy the $1.30 loss neighborhood).

"Relative to expectations, total revenue is expected to be lower at $8.6bn vs. our earlier $8.9bn, with mainline and regional passenger revenue driving the downside."

JP Morgan notes that ex-fuel, the cost per available seat mile improved by ~100 bps from previous guidance "due to better-than-anticipated overall costs." Fuel costs will be up in the quarter only slightly to $3.35/gal vs. previous guidance of $3.33/gal.

"The ~400bp [margin] decline at UAL beg[s] the question as to why an airline with purported synergies at its back is showing margin deterioration relative to a fully-integrated competitor [Delta Air Lines, which guides a gain of 300pb]. In our view, un-integrated results at United were better than this, and that's not how consolidation is intended to work."