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Southwest, JetBlue buck the trend as domestic market rebounds

NEW YORK -- Airline stocks were mostly in the red Friday with all the legacy carriers trading down and budget carriers Southwest and JetBlue Airways trading up, as first-quarter international demand appears to lag that of the domestic market.

At last check, the NYSE Arca Airline Index (XAL) fell about 1.5% to 34.20 points with all but two of its 13 components in the red. In the last 52 weeks the benchmark index has traded in a range of 36.25 to 12.62 points.

Shares of United parent UAL Corp. (UAUA) slipped 1% to $12.98, Delta Air Lines  (DAL) lost about 1% to $13.32 and US Airways  (LCC) fell less than 3% to $5.31.

Meanwhile, benchmark crude for March delivery dropped 21 cents to $75.87 a barrel in electronic trading, down significantly from its 2008 peaks, but still up about 22% from average prices in 2009.

Higher jet fuel prices, falling demand and fierce competition are forcing airlines to look far beyond ticket sales for their livelihood, leading to changes that are going to aim at passengers' pocketbooks for a long time.

Aside from charging people for bags, seat changes and peak-travel times, carriers are increasingly looking at passengers as captive marketing audiences and potential customers for luxury goods.

Some industry insiders think airlines may eventually fly people at cost, and make their profits through merchandising and cross selling.

Airlines post improved results, but see January from different angles

Airlines began reporting their fourth-quarter results this week, and signs were encouraging with American parent AMR Corp. (AMR) posting a narrower-than-expected loss and Continental reporting a surprise profit

But Continental Airlines Chief Executive Jeffrey Smisek warned the enthusiasm over improving traffic and revenue trends may need some cooling off, as early signs for the first quarter points toward accelerated erosion.

Continental  (CAL) , like the other legacy carriers, has a lot of exposure to premium-paying business travel and international routes, both of which have declined sharply in the past year due to the recession. The corporate market is improving, airlines say, but at the rate of a trickle.

Meanwhile the industry is entering a seasonal low point for leisure travel.

"We are a long way from being out of the woods," said Smisek on a post-earnings call with analysts.

Also posting a profit was budget-carrier Southwest Airlines  (LUV) , but with less exposure to the business traveler and focused on the domestic market, it's expecting revenue growth in the first quarter with solid bookings.

"We think a few issues are at play that explains the differing trends," said Barclays Capital analyst Gary Chase, on the Continental and Southwest outlooks.

"First, at an industry level the December demand acceleration is likely carrying through better in the domestic market, pointing to a slightly softer start to the quarter than we expected in the international entities," Chase wrote in a note to clients.

"Second, Continental's capacity growth in January -- up 3% versus flat in February and March -- appears to be having greater impact than we had expected," Chase said. "Lastly, we believe Southwest's relative revenue performance to the industry is likely accelerating."

Next week, Delta Air Lines reports results on Tuesday, followed by United parent UAL Corp. on Wednesday and US Airways (LCC) on Thursday. 

Southwest shares climbed fractionally in recent trading along with its domestic rival JetBlue Airways  (JBLU) .

Story courtesy of Christopher Hinton, a reporter for MarketWatch based in New York