Sequestration Seen as Airline Drag as U.S. Cuts Travel

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 today 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.

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.

“It definitely will put pressure on earnings near-term because business demand is soft,” Savanthi Syth, a Raymond James Financial Inc. analyst, said in an interview. “But capacity control -- the reason that this industry is different than it has been historically and able to create profits -- is still intact. We see sequester as a short-term impact with little visibility as to when it will ease.”

Delta Air Lines Inc. (DAL) paced a decline by the Bloomberg U.S. Airlines Index (BUSAIRL), which slid 0.7 percent at the close in New York. Delta and US Airways Group Inc. (LCC) this week blamed sequestration for shortfalls in a benchmark revenue gauge in March.

Revenue Pressure

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.

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.

Pressure on the stocks from sequestration may “create an interesting entry point” for investors willing to look beyond the next few months, said Syth, who is based in St. Petersburg, Florida. She rates Delta and US Airways market perform.

An outbreak of a bird-flu virus in China also weighed on U.S. airlines today. European and Asian aviation stocks fell on concern that the disease will clip travel for carriers already unsettled by military tensions with North Korea. Air France-KLM Group (AF), Europe’s biggest airline, slid 7.8 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 today to take advantage of the weakness.

To contact the reporters on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net; Mary Schlangenstein in Dallas at maryc.s@bloomberg.net.

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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