Airlines' earnings forecast to rise in '09, as oil prices drop

— -- The same U.S. airlines that looked to be goners three months ago when oil reached $147 a barrel now may be headed toward healthy 2009 profits.

US Airways President Scott Kirby said at a recent conference that investors don't appreciate the magnitude of the changes airlines made to cope with $147-a-barrel oil.

On Tuesday, light, sweet crude closed at $90.06, down about 40% from its midsummer peak.

The Amex Airline Index, which closed Tuesday at 15.92, is languishing at 67% below its 52-week high, set one year ago today.

JPMorgan analyst Jamie Baker says that if current fuel prices are sustained and combined with airlines' steep cutbacks in flight schedules, even a recession of record proportions is unlikely to keep them from making money next year. Losses this year could reach $8 billion.

Baker argues that the most recent $20 reduction in oil prices alone insulates airlines from a 6% fall in annual revenues. Revenues have never fallen by that much in previous recessions:

•In 1991, recession caused only a 2% drop in airlines' annual revenues.

•In the 12 months before the 9/11 terrorist attacks — a period that included the bursting of the dot-com stock bubble and a mild recession — annual revenues dropped just 1%.

•In 2003, fears about Severe Acute Respiratory Syndrome (SARS) caused a 40% drop in revenues on trans-Pacific routes, and worries ahead of the start of the Iraq war drove an 8% drop in domestic revenues. Yet, annual revenues for all of 2003 fell just 3%.

If oil prices return to their summer levels, the prospects for 2009 airline profits would disappear. But most analysts now discount that possibility.

Merrill Lynch last week forecast an average 2009 crude price of $90, but added that the price could drop to around $50 a barrel in the "unlikely event of a global recession."