May 22, 2008 / 4:30 PM / in 10 years

UPDATE 1-Calyon slashes '08 estimates on 10 large US carriers

(Changes source, adds details)

May 22 (Reuters) - Calyon Securities’s Ray Neidl chopped his 2008 estimates for 10 large U.S. carriers, citing unprecedented rise in oil prices, and downgraded Delta Air Lines Inc (DAL.N) and Northwest Airlines Corp NWA.N to “neutral” from “add” on concerns over the companies’ pending merger.

“The industry (Airlines) is at a crossroads at current oil prices, which have risen much faster than we had anticipated,” Neidl said in a research note titled “The industry faces its biggest challenge ever.”

Cost cutting, ticket price increases and additional ancillary revenue cannot match the rise in oil prices, he said, noting that oil prices, which have risen about 95 percent in the past year, account for roughly 40 percent of operating costs.

“The industry needs major capacity shrinkage that will enable large ticket price increases, or oil prices have to decline substantially, for the industry to return to even breakeven levels,” Neidl said.

On the pending merger between Northwest Airlines and Delta Air Lines, Neidl said the market would not give a premium value to the merger in the current uncertain environment.

The two companies said in April they planned to merge and become the world’s largest airline, seeking to counter skyrocketing fuel prices, a weak economy and growing competition from European carriers.

“Mergers, which were supposed to make the industry more efficient, may not work in this environment since there is a large cash outlay upfront and high execution risk in this type of environment,” Neidl said. Following are the estimate changes by the brokerage for 2008: COMPANY CURRENT PRIOR Alaska Air Group Inc (ALK.N) -$1.59 -$0.72 AMR Corp AMR.N -$7.02 -$4.39 Continental Airlines Inc (CAL.N) -$4.10 -$0.10 Delta Air Lines Inc (DAL.N) -$2.06 -$0.60 Northwest Airlines Corp NWA.N -$2.08 -$0.45 UAL Corp UAUA.O -$10.84 -$7.92 U.S. Airways Group Inc <LCC.N -$9.35 -$5.50 AirTran Holdings Inc AAI.N -$1.03 -$0.58 JetBlue Airways Corp (JBLU.O) -$0.33 $0.02 Southwest Airlines Co (LUV.N) $0.32 $0.45 (Reporting by Purwa Naveen Raman in Bangalore; Editing by Amitha Rajan)

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