Merrill Lynch lowers 2008 earnings forecasts for U.S. airlines

San Francisco (Thomson Financial) - Merrill Lynch Monday lowered its 2008 earnings forecast for U.S. airline companies, citing rising oil costs and a recessionary forecast. The firm said it expects the eight largest carriers will together swing to a $1.5 billion loss.

Airline stocks remain buy-rated because they "are already discounting the worst with some of the names having declined as much as 25% over the past week," analyst Michael Linenberg wrote in a note to clients.

However, risks abound, including oil prices staying above $110/bbl, and the sector is not for the faint-of-heart, he said.

"Record high oil prices and a recessionary forecast ... are unequivocally bad for airline earnings," he said.

The American Stock Exchange Airline Index (XAL) was trading around $1 down at $23.77 Monday. It earlier hit a low of $23.49.

Linenberg raised his airline fuel cost estimate for the year to $2.97 a gallon from an earlier forecast of $2.56/gallon.

April crude oil futures were trading around $4.50 down at $105.78, after reaching an intraday high of $111.80.

The industry's major players should return to profitability in 2009, Linenberg said, updating his previous estimate of a net gain of $1.7 billion in 2008. He called the sector downturn "modest ... given the staggering rise in jet fuel prices."

"Ironically, a world of $100+/bbl oil prices likely means reduced air traffic delays and congestion, no pilot shortage, significantly less [capital expenditure] requirements, higher barriers to entry, and more likely that airlines are forced into mergers," he noted.

Linenberg lowered the 12-month price objectives for 10 major and low-cost carriers.

Alaska Air Group Inc. was lowered to $26 from $36, American Airlines parent AMR Corp. to $18 from $25, Continental Airlines Inc. to $27 from $35, Delta Air Lines Inc. to $17 from $25 and Northwest Airlines Corp. to $15 from $23.

United Airlines' parent UAL Corp. was also lowered to $35 from $51, AirTran Holdings Inc. to $8 from $10, Allegiant Travel Co. to $35 from $47, JetBlue Airways Corp. to $7.50 from $10 and US Airways Group Inc. to $15 from $25.

Among the largest airline companies, AMR shares fell around 7.6% to $8.55, UAL stock slipped 10% to $20.25, Delta shares dropped 6.7% to $8.97 and Northwest stock declined 8.2% to $8.73.