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  • ANALYSIS: Financial analysts predict strong 2019 despite concerns

ANALYSIS: Financial analysts predict strong 2019 despite concerns

A decline in fuel prices should enable US airlines to expand profit margins in 2019 despite slowing economic expansion, declining unit revenue growth and potential for a hike in labour rates, financial analysts say.

Those conditions have led analysts to predict solid financial results this year, while simultaneously warning of underlying, longer-term concerns.

"We believe airlines will see margin expansion in 2019 driven by a combination of continued revenue momentum and a recent decline in fuel costs," says a 10 January report from financial firm Cowen. "We continue to have a favorable bias towards the airline industry."

Cowen expects the industry will post an 8% profit margin in 2019, up from 7.2% in 2018. It expects industry revenue will increase about 6%, thanks largely to increasing ancillary fees.

"We are raising our 2019 estimates across the board," says an 8 January airline research report from JP Morgan.

Declining fuel prices more than offset slipping unit revenue, leading JP Morgan to predict airline industry margins will increase two percentage points year-over-year in 2019, the greatest gain in four years.

The reports came the same week several airlines disclosed their fourth quarter unit revenue will be in the lower end of earlier-estimated ranges. Carriers will begin reporting 2018 results next week.

"US airlines may struggle to gain traction" in 2019, says Morgan Stanley in an 8 January report.

Though the bank likewise projects improved 2019 margins, it trimmed its 2019 unit revenue growth forecast to just 0.5%, citing "easing unit revenue trends due to decelerating economic growth, lower fuel and [foreign exchange] pressures".

Analysts doubt airlines will significantly boost capacity in response to lower fuel prices.

Cowen says oil price volatility should lead airlines to "maintain capacity and pricing discipline".

Morgan Stanley notes that fuel prices, while down significantly since October 2018, remain at levels similar to one year ago, suggesting a "relatively normal trading range".

"These dynamics… reduce the likelihood of an aggressive response due to lower fuel," Morgan Stanley says.

Analysts also warn of costs creeping higher, noting that United Airlines' pilot contract becomes amendable this month.

Morgan Stanley anticipates United's pilot wages could increase 5-10% by mid-2019 – gains other carriers are likely later to adopt. Also, new environment regulations set to take effect in 2020 could force airlines to purchase higher-quality fuels, possibly pushing up fuel prices 30% in 2020.

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