I-S Comment 06-24-04

Information for Decisions Equity Market Sector & Industry Comments New York • London • Boston June 24, 2004 Airlines: Strong Economic Tailwinds Not Enough for Earnings Take-Off Certain industries that rely heavily on both consumer and business spending rely more heavily on the business side for their profitability. Businesses, though more price-sensitive than ever, are still less so than individuals. When business profits are strong, as they are today, and spending recovers, it leads to higher average prices and margins for hotels, restaurants, and airlines (and also advertising-driven industries, the subject of a separate report, could also be included in the list). With a modest lag, growth in corporate profits has the ability to slingshot performance at such industries, the beginning of which is being seen currently. Airlines should theoretically be a major beneficiary Airline Traffic Improving, Pricing Not of this key top-down fundamental, especially at a (seasonally adjusted) time when both business and consumer spending power are both strong. Traffic is indeed growing well 60 16 (see chart), after having been slammed down by 9/11 55 15 and then again by the Iraq war. Traffic levels are still 50 14 5% below the 2001 peak, but May traffic was up 45 13 15% over last year, and the most recent three-months 40 12 rose 6.5% at a seasonally adjusted annual rate 35 11 (compared against a long-run pre-9/11 average of 3.7%). Moreover, load ...