Sequestration Seen as Surprise Airline Drag With US Govt Travel Cut

Friday, 05 Apr 2013 12:07 PM

 

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U.S. government spending on air travel probably fell as much as 30 percent in the past month amid congressionally mandated budget cuts that threaten to keep weighing on the industry, a JPMorgan Chase & Co. analyst said.

Demand from federal employees may stay at this level or even lower “in perpetuity,” JPMorgan’s Jamie Baker wrote in a note to clients in which he estimated that the government accounts for 3 percent to 4 percent of airline revenue. He pared his full-year revenue projections by as much as 3 percent.

Delta Air Lines Inc., United Continental Holdings Inc. and US Airways Group Inc. led declines in the Bloomberg U.S. Airlines Index, which slid 2.9 percent at 11:40 a.m. in New York. Delta and US Airways this week blamed sequestration for shortfalls in a benchmark revenue gauge in March.

Sequestration’s impact on U.S. air travel won’t be as bad as the 2008 financial crisis, H1N1 flu, the SARS respiratory outbreak or tsunamis, “but it still stings,” wrote Baker, who rates Delta and US Airways as overweight. Declining fuel prices may temper the fallout, he said.

Delta’s revenue for each seat flown a mile only rose 2 percent in March, short of a forecast for at least 4.5 percent, according to the airline, which attributed part of the drop to sequestration. Domestic traffic including regional partners slid 0.1 percent, Atlanta-based Delta said.

Forecast Missed

US Airways said March unit revenue was unchanged, lagging behind its expectation for a 2 percent to 4 percent gain because of “reduced close-in demand believed to be driven largely by the sequester.”

The drop in airline stocks because of sequestration is “unwarranted,” Helane Becker, an analyst at Cowen Securities LLC in New York, wrote today in a note to clients.

Excluding government reductions, airline bookings “remain robust,” said Becker, who recommends buying Delta and Tempe, Arizona-based US Airways.

An outbreak of a bird-flu virus in China also weighed on U.S. airlines. European and Asian aviation stocks fell earlier on concern that the disease will clip travel for carriers already unsettled by military tensions with North Korea. Air France-KLM Group, Europe’s biggest airline, slid as much as 8 percent in Paris.

Any travel disruptions from the bird flu probably would be temporary, Michael Derchin, an analyst at CRT Capital Group LLC in Stamford, Connecticut, wrote today in a note. He recommended buying airline stocks to take advantage of the weakness.

© Copyright 2014 Bloomberg News. All rights reserved.

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