DAVID FIELD WASHINGTON
Investor confidence has begun coming back to the airlines, as have passengers. All that is needed now is profits as carriers start to post dismal fourth quarter losses.
Early reports were so encouraging that one noted observer, Deutsche Bank's Susan Donofrio, called herself "quite bullish" on airlines. Shares saw a rise even as airline executives explained their year-end results as better than the worst case but still with a long way to go. And many observers now say that the way back will lead to a different reality than the old one.
By mid-January, the majors had racked up more than $2 billion in fourth quarter losses, not counting the huge deficit expected from United Airlines.
American Airlines reported one of its worst ever quarterly losses, and its fourth consecutive quarter of losses. It was going through cash at about $6 million a day, an improvement from the late autumn cash burn of between $8.5 million and $9 million. Chief financial officer (CFO) Tom Horton sees the cash position turning positive some time in the second or third quarter. Similarly, Continental Airlines chief executive Gordon Bethune said that the carrier is likely to be modestly profitable in the second and third quarters.
Most executives explained that traffic was coming back, although ABN Amro analyst Ray Neidle noted they are "still buying" the growth with low fares. Fourth-quarter yields fell by 10-16%, estimates Salomon Smith Barney analyst Reno Bianchi. At Southwest Airlines, the strongest performer of the year, yields per seat were off by an average of 20% in the quarter. "We basically had a continuous sale on." says CFO Gary Kelly.
On the revenue side, business travel is down by about 30%, which produces only an 8% decrease in load factors but a 33% drop in revenues, says Peter Belobaba of the Massachusetts Institute of Technology's (MIT) Global Airline Industry Program. On the costs side, says Eclat Consulting's William Swelbar, a member of the MIT Program, the old tools to recovery are simply not at hand. Even though labour costs are rising, they are not that key. For the majors, labour costs made up only 0.4% more of operating costs in the first half of 2001 than in the year before. "You'd think it's all labour's fault, but it's not," Swelbar says. He calculates that for network carriers to raise their annual seat capacity by 10%would cost them close to seven times the amount that it would cost if low-fares rivals flew the same extra capacity.
The cost disadvantage may mean that some of the autumn capacity cuts are permanent. The north east has lost 19% of its non-stop capacity and this is probably not to return, at least until the fate of the north east's largest carrier, US Airways, is determined, he says.
Bethune believes that US Airways, along with United, are the wild cards for the year. "The big question for me is what happens to the two big boys out there and what they do to trash the revenues," he told analysts. "With their kind of cost structures, I don't think they can continue to operate under current market conditions for very long."
United put off announcing its earnings until the very end of January, while US Airways lost about $1.17 billion for the year, excluding special charges, and seems still to be looking for a strategy to get it out of its corner.
Source: Airline Business
