Airline Industry Poised To Report Record Profits Downsizing Lowers Costs; Passenger Volume Increases Revenue

After years of financial hemorrhage in the 1980s and early 1990s, the airline industry is expected to post another year of record profits - $4 billion - in 1996.

“This is the first time since the wooden propeller was invented that airlines have put together four years of back-to-back profitability,” said Julius Maldutis, longtime airline industry analyst for Salomon Brothers Inc.

The progress came as corporate downsizing continued to save major airlines big dollars. At the same time, increased passenger volumes boosted revenue, helping carriers such as American Airlines Inc. and Delta Air Lines Inc. have a jolly Christmas.

But the industry’s stock market performance has not been as consistent. Stock prices rose significantly during the first part of the year, but gave up some of its gains during the third and fourth quarters. In late December, the Standard & Poor’s industry index stood below the S&P 500-stock index.

The performance in the second half of the year, experts said, stemmed from the ValuJet and TWA air disasters, and from disappointment that fuel did not become as cheap as many experts had predicted.

“Airline stocks are hypersensitive to minute movements in fuel prices. A one-penny-a-gallon (increase) costs the airlines $160 million more in operating expenses,” Maldutis said.

Other factors playing into the sector’s erratic performance over the past few months included uncertainty about the proposed massive marketing alliance between American Airlines and British Airways PLC, as well as rumors of possible mergers and takeovers.

Experts see more promise for airline stocks in the first quarter, especially since carriers continued to receive record bookings for travel during the holiday season and are looking for another record year in 1997, with earnings at an estimated $4.4 billion.

The carriers likely will have a windfall in the first quarter as a result of the expiration of the 10 percent passenger excise tax on plane tickets. The tax, which expires Dec. 31, generates $4.6 billion annually for the U.S. Treasury. It may take Congress several months to reinstate the tax, and rather than give passengers a 10 percent discount, the airlines - led by Continental Airlines Inc. - are raising fares to capture the 10 percent. Because consumers already were paying the tax, it’s unlikely the move will spark a downturn in travel, experts said.

“The airlines are being very aggressive about capitalizing on the chance to raise prices by 10 percent,” said Glenn D. Engel, airline analyst with Goldman Sachs & Co. “You’re going to see a spike in earnings because of this.”

Analysts said the stocks of the major carriers likely will continue to outperform those of smaller, regional airlines. They said the “ValuJet syndrome” - a reference to the tumble the discount airline’s stock took after its May crash in the Everglades - has made many investors shy away from low-cost carriers.