US profits are almost back - but barely, and with the warnings that overcapacity is fast approaching. The difference this time is that warnings also apply to low-cost capacity, writes David Field
For the third quarter, American Airlines parent AMR posted a nominal $1 million profit, a telling feat. Buoyed by heavy summer flying as cost-cutting steps took effect, the world's largest airline broke a string of 10 losing quarters.
This quarter's showing was, in reality, the outcome of several special charges and one-time gains; the pre-tax operating loss was $23 million. But coming six months after AMR's near-bankruptcy, the forced resignation of chief executive Donald Carty, and the reluctant union acceptance of more than $1.8 billion in concessions, the results suggest that, as AMR's chief executive Gerard Arpey told analysts and the media the group is "generating momentum".
The momentum was driven in part by the fact that the airline even turned a small operating profit as labour costs dropped 20%, to $1.7 billion from $2.1 billion a year earlier.
The momentum helped drive a rumour - that American might be ready to start up an in-house, low-cost, off-brand unit. In a meeting with investors, Arpey would not deny this outright, but downplayed it, saying the carrier was closely watching units at Delta and United Airlines to see if they can achieve truly lower costs, not just uniformly lower revenues. Arpey told the Society of Airline Analysts in New York that overall, American would focus on its hub-and-spoke network to gain a "disproportionate" share of the business market, while capturing its "fair share" of leisure travel.
Delta was the only major beside US Airways and bankrupt United to report an outright loss. By early November, Delta was predicting significantly larger fourth quarter losses - of $365-415 million - than predicted. Chief financial officer Michele Burns said she anticipated a $140 million payout to its pilot pension plan as more pilots than planned had chosen retirement. Delta had estimated a net loss for the fourth quarter of up to $275 million, including a $26 million charge from the sale of 11 Boeing 737s and delivery slots for not-yet-built aircraft.
Still, the three losers all showed progress. US Airways, for instance, made a $245 million improvement in the quarter, to net only a $90 million loss. United parent UAL reported a net loss of $367 million, including $330 million in special charges and reorganisation expenses, mostly for rejecting certain aircraft leases. That was less than half the net loss of $889 million in the same period a year ago.
Consultant Bob Mann of RW Mann says that most carriers "on balance appear to have stabilised. But that's a long way from being healthy." The question is whether the winter season will be followed by a spring in which seats come back on the market in a nearly recovered economy because management interprets survival as encouragement to grow.
UBS airline analyst Sam Buttrick says: "Long-term capacity discipline is myth. Planes were built to fly. Discounters are planning on building the equivalent of an airline the size of Continental Airlines over the next four years, with compound annual growth since 1990 of 13.2% by the end of next year. But by 2007, discounters will have added 364 aircraft in their fleets, about equal to Continental's 2003 mainline fleet of 353 aircraft. By 2006, the discounters' capacity additions will more than total the majors' domestic capacity cuts of 2001-3."
Buttrick adds that major networks, which are likely to add disproportionately in markets where the low-fare carriers are competitive, will add some 6.5% capacity next year. Similarly, Lehman Brothers analyst Gary Chase fears that the network carriers will resort to overkill in an attempt to bury their low-cost competitors. Chase worries "that the network airlines are increasingly likely to respond to the growing low-cost threat by retaliating in one form or another".
He points out that Delta added significant capacity in between Atlanta and Los Angeles in response to jetBlue's entrance to the market. JetBlue has since pulled out.
Source: Airline Business
