Ten out of the 11 US majors turned a net profit last year, and the available results for 29 non-US carriers, mostly for partial years, show a doubling of profits overall and some impressive individual turnarounds.
However, the news is by no means uniformly good. TWA, which had not reported full-year results at presstime, lost almost $200 million in the first nine months, and several non-US carriers continued to lose money.
Among the US majors, Delta reported the highest net profit, with its $510 million result following a $159 million loss in calendar 1994. Next came Northwest, United's parent UAL, FedEx and Continental, all of which improved their bottom lines markedly. Even USAir managed an unexpectedly high $119 million net profit. Still, there were disappointments, with American's parent AMR suffering a fall in profit to only $167 million. Southwest only marginally improved its results and both America West and Alaska Air suffered profit falls.
In certain respects, this must be taken with a pinch of salt. Delta's result is impressive at first sight, but the carrier has warned that it may take a restructuring charge of as much as $650 million in the March 1996 quarter.
Employee ownership also plays havoc with the results. UAL and Northwest argue that their results are depressed by their employee stock ownership programmes. Because all the Esop shares have not yet been issued to employees, the companies have to include these shares as cash expenses. UAL says it would have made a net profit of $662 million on a fully distributed basis, and Northwest says its net income would have risen to $692.5 million.
Several other results are distorted by special items. American took a $533 million pre-tax charge in its fourth quarter, covering early retirements and the writedown of DC-10s and part of the American Eagle turboprop fleet. USAir's net profit would have been $164.9 million except for some one-off items and a special profit-sharing programme.
On an operating level, the fundamentals were much improved in 1995 with all the majors reporting a surplus. Operating profits were more than $1 billion at Delta and AMR, followed by $902 million at Northwest, $829 million at UAL and $321.7 million at USAir.
These results were underpinned by one item: higher yields. Every US major except American improved its yield during the year, and American's only fell marginally. The best yield improvement was Continental's 9.4 per cent increase, helped by the carrier's move away from the low-yield, highly competitive markets targeted by the ill-fated Continental Lite low-cost carrier. The effect was even more dramatic in the fourth quarter, when Continental's yield rose by 15.4 per cent to 13.03 cents per RPM, the third highest yield after USAir and Delta.
USAir benefited from the relaxation in fare wars following Continental Lite's demise, allowing it to raise its yields by 7 per cent, while United's rose 4 per cent in 1995.
In terms of operating costs, results were patchy despite the well publicised restructuring programmes. Here Delta performed the best, with a 5.4 per cent drop in unit costs to 8.61 cents per ASM.
United and Southwest both achieved small reductions in unit costs, but elsewhere unit costs rose. While the increases at American, America West and Alaska were relatively small, Continental's unit costs rose by 12.5 per cent and Northwest's by some 7.2 per cent.
Continental's cost increase reflects its investment in improved service, and this seems to have paid off with higher yields. The carrier also paid out $50 million to its employees in profit shares and on-time bonuses. Northwest paid out $179 million in stock-based compensation to employees, up from $19.7 million in 1994.
Traffic grew steadily in 1995 with international growth surging ahead for the US carriers. But load factors were reasonably flat, with only a couple of carriers making large gains on 1994, and a few losing ground. This may reflect the carriers' awareness that it is higher yields, not necessarily load factors that lead to profitability.
The US majors registered a 5.3 per cent increase in total revenue passenger km, with a 7.1 per cent increase internationally. Load factors rose for most carriers, although some US majors suffered, which led to a combined increase of only 0.8 points to 67.2 per cent.
Southwest suffered the most, dropping 2.2 points to 65 per cent. But Alaska Air and Delta each dropped about 1.0 percentage point and United lost 0.6 points.
Northwest showed a marked gain of 3.4 percentage points to 71.5 per cent, while USAir rose by 2.5 points to 64.7 per cent.
Alaska Air was the clear leader in growth, registering RPK increases of 13.6 per cent, driven by a 17.7 per cent increase in domestic RPKs and only marginally affected by a 23.4 per cent RPK fall on its few international routes.
Among the non-US carriers, there are three groups of carriers - those which improved their performance and consolidated their lead over the rest of the industry; those for which recovery remained elusive; and a few which fell back.
Inevitably, the winners include British Airways, SAS, Air New Zealand, Cathay Pacific, Qantas and Singapore Airlines. However, many of these results are only for part of the year and seasonal factors are likely to influence the final outcome. For example, BA's $512 million first-half net profit places it well ahead of SIA, but SIA usually outperforms BA in the second half resulting in SIA showing the highest full-year profit.
For Lufthansa and KLM, the apparent rise in income is the result of the weaker US dollar; measured in local currencies, Lufthansa's nine-month pre-tax income was flat and KLM's fell 3.6 per cent. Lufthansa says the strong mark cost it DM440 million ($307 million) in the period. KLM also suffered from a resumption of pension premium payments and increased income tax, but expects a 10 per cent rise in earnings per share for the full financial year.
Several other carriers also posted encouraging first-half results. ANA's $70 million profit was a move in the right direction, while Finnair doubled its first-half net profit and Mexicana and Turkish Airlines moved from loss to profit. Aided by much improved balance sheets, Olympic and Varig narrowed their first-half losses but remained in the red.
For some, any recovery was insufficient at best. Air France made $47 million in its first half, but this included a $77 million gain from the sale of the Sabena shareholding. Air France almost trebled its operating profit to $194 million, but took a $128 million charge for its cabin crew redundancy scheme. The carrier expects a poor second half; its target is a loss of $243 million for the full year, excluding the reserve for cabin crew redundancies, but it says this may be unreachable, as December's strike action cost at least $60 million in lost revenues.
There is a similar story at Alitalia, which only narrowed its first-half loss slightly and where the restructuring programme is far away from completion. TAP lost almost $100 million in its first half, but did not provide comparative figures for 1994.
The great recovery of 1995 simply did not materialise for some carriers. Ansett suffered from a domestic market share drain and international start-up costs, resulting in a plunge in profits in its year to 30 June, although the company did pay down $186 million in debt during the period.
Air Canada's net profit halved during the first nine months, affected by a weak Canadian dollar, some extraordinary gains in 1994, and investment in new aircraft and cross-border routes. Canadian Airlines slipped into a loss in the same period, citing a weaker economy, currency factors and higher fuel costs. However both Canadian carriers performed well in the third quarter.
The Swissair Group doubled its first-half loss to $72 million as a result of currency factors, higher tax payments and the closure of charter subsidiary Balair/CTA. However, Swissair has an aggressive depreciation policy and a higher than average use of off balance sheet leases, and its non-airline associates bring in significant profits.
The 20 non-US majors in the sample which have reported 11-month or 12-month traffic so far have grown by an overall 5.9 per cent in passenger numbers and 7.7 per cent in RPKs, with freight tonne km increasing by 9.4 per cent.
The fastest growing non-US carriers in RPK terms were Turkish Airlines (18.1), CSA (17.6), Korean Air (16.3) and Sabena (15.0). Mexicana's traffic dropped 7.4 per cent, with RPKs following with a decrease of 4.7 per cent. Olympic Airways suffered the largest fall in RPKs of 5.8 per cent, due principally to the cancellation of its Tokyo route. However, passenger numbers were up with an increase in short-haul traffic.
The freight markets were good for Cathay Pacific, CSA and China Airlines which all reported increases of more than 15 per cent. But Olympic's freight traffic fell by almost as much. n
Source: Airline Business
