Key Points - Update:

• Despite the sluggish economy, Transportation-Airline has the second highest Zacks Revision Ratio, a bullish sign
• Falling fuel prices are expected to help fourth-quarter earnings
• Reduced capacity and higher fees are also playing a positive role

Profit Forecasts Taking Off, Despite Economic Slump

Transportation-Airline has the second-higher proportionate amount of positive earnings estimates revisions for any industry group¹. The Zacks Revisions Ratio is 3.59 for Transportation-Airlines, versus 0.28 for the entire Zacks Rank universe. During the past 4 weeks, 79 forecasts have been raised and just 22 cut.

Why?

The price of oil continues to drop. Fuel prices had been a big headwind all year, so the decline is having an immediate impact on fourth-quarter earnings.

Capacity has been reduced. As anyone who has flown this year can attest, planes are packed. The reduced capacity has resulted in improved per seat revenues. (A common metric for this is revenue per available seat mile or RASM.)

Fees have been put in place. Most domestic airlines now charge for such things as checking a second (or first) piece of luggage, pillows and food. All of this helps revenues.

The combination of these trends has helped improve the profit outlook for airlines.

Risk-adverse investors should understand that not everything has improved. Load factors, a measure for how full a plane is, vary across airline. Many airlines lost money and the industry continues to deal with a tough pricing environment. Therefore, the positive estimate revisions represent a trading opportunity, if the markets rebound, as opposed to a sign that long-term prospects have improved.

Third-Quarter Profit Highlights

Allegiant Travel Company (ALGT) earned 24 cents last quarter, besting expectations by 6 cents. Revenue per available seat mile (RASM) jumped 33% and the load factor improved to 93.8%. All 4 covering brokerage analysts raised both their 2008 and 2009 profit forecasts.

JetBlue (JBLU) lost 2 cents per share last quarter, pleasantly surprising brokerage analysts who had been expecting a loss of 5 cents per share. The load factor improved 2 points to 84%, while passenger revenue per available seat mile (PRASM) increased 16%. The majority of the covering analysts narrowed their loss projections for this year and raised their earnings estimates for 2009.

Southwest Airlines (LUV) reported an adjusted profit of 9 cents per share, topping expectations by 3 cents. RASM rose 9.3%, but the load factor declined 5 basis points to 71.6%. Nearly all of the 14 covering brokerage analysts raised their full-year earnings estimates for this year. Half of the covering analysts also raised their profit projections for 2009.

(Southwest Airlines had been more aggressive than its peers in hedging against higher fuel costs. As fuel prices fell, the company lost money on its hedges and was forced to take a $247 million special charge in the third-quarter. The expense is not reflected in the reported profit number.)

UAL Corporation (UAUA) lost $1.99 per share, but topped predictions for a larger loss of $2.42 per share. PRASM increased 6.1% on an adjusted basis. The company's load factor, however, declined by 1.6 basis points to 82.4%. The majority of the covering brokerage analysts narrowed their loss expectations for this year and raised their profit projections for next year.

US Airways Group (LCC) lost $2.35 per share, which was 21 cents better than brokerage analysts had expected. PRASM increased 4.4%. The load factor fractionally improved to 82.3%. The majority of the covering brokerage analysts narrowed their loss expectations for 2008 and raised their profit projections for 2009.

ALGT is a Zacks #1 Rank ("strong buy") stock. JBLU, LUV, UAUA and LCC are Zacks #2 Rank ("buy") stocks. Transportation-Airlines contains 2 other Zacks #1 Rank stocks, Alaska Air Group (ALK), China Eastern (CEA) and Ryanair (RYAAY). The industry group also contains 8 other Zacks #2 Rank stocks.

Related ETFs

There is no ETF solely focused on the airlines. The closest is the Dow Jones Transportation iShares (IYT). This fund also holds railroads, trucking companies, freight companies and shippers.

¹Electronics-Military Systems has a higher revisions ratio, but it is also contains far fewer companies.

Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.