Every US chief executive expects to find the next economic downturn around the corner - a fact acknowledged by United Airlines chairman Gerald Greenwald when he said: "Yes, Virginia, there's a bear market out there. How big, how bad and how long it stays remains to be seen." But when will that corner be turned?
As the calendar year draws to a close, the signals from the US airline industry are confusing. Third quarter results (see data, page 76) illustrate the conundrum. Several of the majors, including American Airlines, Continental Airlines, Delta Air Lines and United, made record profits. There were strong showings from American (operating income up 20.6% to $732 million), Continental (up 28% to $265 million), Delta (up 29.7% to $777 million) and US Airways (up 47.7% to $267 million).
Many of the domestic carriers also enjoyed a strong third quarter. Most notably, Southwest Airlines' operating income jumped 34.3% to $204 million; the Alaska Air Group increased its operating income by 17.3% to $90 million; Hawaiian Airlines posted its best quarter ever with net profits of $6.1 million on revenues of $115.5 million; and America West also had a record third quarter with a net income of $21.9 million on $499.2 million revenues. The surprise came from Denver-based startup Frontier Airlines, which turned its own financial corner and posted a $9.9 million net profit for its September quarter. For the same period in 1997, it lost $2 million net. Operating revenues leaped by 51.3% to $56.9 million, even though costs rose by just 18% to $47.1 million on a capacity growth of 24.1%. "To say we are pleased would be an understatement," says Frontier president Sam Addoms.
But the surprises were less sweet in other corners. Trans World Airlines' results were disappointing in almost every way. It turned in a third quarter loss of $5.3 million against 1997's third quarter profit of $6.3 million and saw operating incomes tumble from $63.8 million to $23.7 million. AirTran Holdings, which includes the former ValuJet, was similarly disappointed with its third quarter loss of $10.9 million, even though the result was better than last year's $14.6 million loss. AirTran had been hoping to post a small profit this year, but its costs have continued to rise steeply. Third quarter results show them increasing from $69.2 milion to $120.4 million.
Then there were the wounds to be licked following battles with pilots' unions. Northwest Airlines, which has to negotiate pay contracts with five more labour groups, posted a net loss of $224 million compared with 1997's third quarter $290 million profit. Air Canada's pilot strike also put it into the red to the tune of C$61 million ($40 million). Air Canada describes the results as "profoundly disappointing" after 1997's C$284 million third quarter operating profit.
For all the good news that wraps around the bad, however, there can be no mistaking the signs of unease that the US majors are beginning to feel. Perhaps in an effort to put itself in control of the next downturn, American has put the industry on guard by announcing a revised 1999 growth plan that will cut growth by 2% to between 3.5% and 4%. It will retire eight McDonnell Douglas DC-10s and two Boeing 727-200s several years earlier than it had intended so that a total of 16 aircraft will be retired next year. American still plans to take delivery of 25 new Boeings in 1999, but the additional retirements are expected to save $40 million.
American's senior vice-president of finance and planning, Gerald Arpey, says the move reflects changing global economic conditions. As with most of the US majors, American is caught between having to meet the demands of a still strong domestic market, while keeping a wary eye on the shifting international scene. Consequently, American is deferring some international services such as Chicago to Moscow and Boston to Tokyo. "We believe we have struck the right balance for the next year and will continue to monitor the marketplace to be sure we are poised for opportunities, yet not vulnerable to economic uncertainties," says Arpey.
United, too, has also let Wall Street know that it is preparing for the downturn. Its message is that it will be able to manage its way through the next recession so that the airline will continue to be profitable. "In any downturn, we will get hurt. Our challenge is to manage it so it does not hurt too much," says United's senior vice-president of planning, Rono Dutta. A key to that management, adds Dutta, will be through controlling capacity. United intends to use its fleet of older 727s as a means of restraining growth when necessary. By holding on to those 727s as a buffer that can be retired quickly, United says it will have the flexibility to bring down capacity so that the current projected rate of growth of 3% could be cut to 1% or even to negative growth. It has yet to be seen whether Wall Street will swallow that message. As Dutta says: "Investors say, prove that you can make money in a recession. We need to go into one, handle it well and put it behind us."
With most US carriers enjoying load factors well over 70% and record profits still liberally sprinkling the table, the forecasters remain wide apart in their opinions of when the next downturn will hit. But as Greenwald sums it up:" When it comes to the economy, you can't run and you can't hide. All you can do is run the business." There's a bear out there somewhere.
Source: Airline Business
