Airlines see new demand, but hold the applause

By Kyle Peterson - Analysis

CHICAGO (Reuters) - A note of optimism crept into major U.S. airline outlooks in the past week with executives trumpeting the first signs of returning demand from well-heeled business travelers who pay full fares and fork over cash for in-flight perks.

But at the same time, they warn that it's way too soon to declare an industry recovery as a suddenly thrifty Corporate America gropes its way out of a prolonged economic recession and keeps a lid on travel expenses.

Airlines are eager to spotlight evidence of a possible rebound. But for now, the evidence seems largely anecdotal.

"Definitely what we're hearing is that business travel is coming back, but there aren't a lot of senses around business travel fares," said Helane Becker, airline analyst at Jesup & Lamont.

"It's definitely not at price points that we've seen in prior years. And I don't think we'll get back to those levels for another year or so," Becker said. "People are still very price-conscious."

Third-quarter earnings for major U.S. airlines were mixed as carriers grappled with weak demand, volatile fuel prices and competitive pressures. Fuel prices have eased from their 2008 peaks but they have been inching higher for most of 2009.

Becker said earnings statements were especially troubling when she compared year-to-date airline revenue with fuel cost savings. In almost every case, revenue declines outpaced fuel savings, she said.

For example, Delta Air Lines' (DAL.N) revenue was down $5.3 billion year-to-date, compared with fuel cost savings of $3.6 billion, Becker said.

"That's bad," she said. "There's no other offset."

Another airline analyst, Michael Linenberg at Bank of America/Merrill Lynch, noted that while it is true that revenue declines outpaced fuel savings for the first nine months of 2009, the two measures were nearly even in the third quarter.

"By the time you get to the third quarter they're kind of running neck and neck with some carriers actually benefiting

from a bigger fuel decline," Linenberg said.

"The fact is, you are seeing the inflection point," he said, adding that it was unclear whether the shift is sustainable.

Airlines shares have been rising since March, and analysts are increasingly bullish. But Becker said the outlook for business travel demand is little reason to buy.

Linenberg, however, said airline shares could benefit greatly if an economic recovery has traction.