JAN LEVERE
The driving factors behind a June quarter operating loss for US Airlines were lower corporate spending and higher labour costs. Prospects seem glum for the rest of 2001 and the outlook for 2002 is equally uncertain.
The US majors reported their worst second-quarter performance since 1992 earlier this summer and Wall Street analysts warn that the end of the industry's woes are not clearly in sight. The quarterly net loss of close to $400 million marked only the third time in the past 30 years US carriers have posted a June quarter operating loss. For the first half they are now have a deficit of over $1 billion.
In the quarter, yields were down by 6.5% and revenue per seat fell by 9%. Sam Buttrick, an analyst at UBS Warburg, calculates that corporate travel spending fell by 12% while leisure spending was "flattish". In addition seat costs grew by over 4%, driven by higher labour expenses and only partially offset by lower selling commissions. Buttrick notes that June domestic revenues registered their largest annual decline in decades. This performance bodes "poorly for the third quarter and to a lesser extent the fourth quarter" he says, projecting a $1.4 billion net loss for the industry this year. "Prospects for meaningful second half revenue recovery have faded," he adds.
Analysts note, however, that the outlook on seat capacity for 2002 remains good. Buttrick forecasts that system capacity for the majors will rise by only 1% or so, although regional jet expansion adds another 1.5 points to the figure.
Noting that expenses can be cut only so much, Buttrick questions whether there should also now be action on the demand side. "It would be refreshing to see carriers take initiatives to both stimulate business demand, and, more importantly, restore the value proposition of business travel, lost in recent years to higher fares and increased travel times,"he says. "We believe that without a solid recovery in business demand, no amount of discipline on the part of the carriers will produce good profitability."
Business decline
Similarly, Michael Linenberg, airline analyst for Merrill Lynch, argues that the main reason for losses in the quarter centres on the decline in business travel - down "on the order of 15% to 20%" as the economy weakened. He adds that fuel costs were up 13%, which also contributed to the red ink. Noting that no carriers have indicated they were seeing any improvement in bookings by business travellers, Linenburg does not expect meaningful recovery in this sector "until the fall, at the earliest".
Linenberg is forecasting a 2.5% increase in system capacity this year and 2.6% next, which he believes makes him "more confident in the industry's ability to regain pricing power sometime in 2002".
Brian Harris, airline analyst for Salomon Smith Barney, said the June quarter was the worst quarter for domestic revenue per available seat mile - down almost 10% - in more than a quarter century, with only Alaska, Continental and Southwest of the nine majors posting profits. Noting that Continental was the only major hub-and-spoke major carrier to post a profit, he said it was aided by "relatively favourable labour costs, a strong hub system, and revenue strength in Houston, as oil services is still strong".
Harris expects the third quarter to be "tough", with a pre-tax loss, "given that business travellers will continue to find ways around high fares and the business buy down effect".
Harris says he is "comforted" by capacity cuts carriers have announced; he expects system capacity to grow 0.9% next year. And although he anticipates relief on the fuel side, with prices down 8%, he said "we don't expect significant relief on the main earnings driver, revenues".
Harris predicts that travel policy decisions for 2002 made by corporations this October may prove "pivotal" to 2002 industry revenues. If expectations for 2002 start to look more upbeat in October, corporations may "ease up a bit on their restrictive travel policies", he argues. Next year could then prove to be a strong revenue year for the airlines, "though probably not as strong as the consensus appears to expect", he says, adding that if the outlook is still weak in October, then 2002 could be "another tough year for the airlines, even if it turns out to be a good economic year after all".
Source: Airline Business
