Some carriers hope a slow recovery has started. But if so, why are results still so bad? asks David Field
If US network carriers think a recovery has started, they are grasping at straws. Although the second quarter was profitable for some US carriers, most that posted profits owed them to their share of the $2 billion federal security payment. Including that compensation, the majors ended the quarter with a modest $176 million net profit. Without this and other special items the loss was only a little better than the $1.3 billion loss of a year ago.
At United, even a $300 million government cash handout could not stem the losses. The airline, in bankruptcy reorganisation since December, posted the industry's heaviest losses at both net and operating level Yet United has nevertheless continued to fulfil the covenants set by its creditors for meeting minimum performance standards.
The compensation grant may also have had an unintended effect on labour. US Airways will end a 5% employee pay deferral, although chief executive David Siegel says he is doing so reluctantly. "Having a one-time grant determine our profitability for the quarter should by no means indicate that we are back on the road to sustained profitability," he says.
Some carriers entered the third quarter with fairly solid cash positions. Delta is sitting on $3 billion, up from $2.5 billion at the end of the first quarter, while Northwest raised its holding by a similar amount to $2.9 billion and American's cash position rose to $2.1 billion from a low of $1 billion.
Although some carriers were able to complete finance deals in the June quarter, the capital markets remain unfriendly territory heading the third quarter, with two majors pulling back offerings that met with a hostile reception.
Continental withdrew the sale of its ExpressJet Holdings stake, and in early August, American stopped a planned $250 million convertible-bond issue.
In contrast to the majors, the low-fares sector has continued to thrive, with healthy net profits for the likes of AirTran, JetBlue Frontier and Southwest even before the federal handout. Including the increasingly low cost America West and Alaska Air in that group too brings their collective quarterly net results to over $165 million.
Deutsche Bank's Susan Donofrio says this group could earn $133 million in the third quarter, way ahead of the modest positive posted in last year's third quarter.
The low-cost carriers established some important milestones in the quarter. In May, Southwest boarded more domestic passengers than any other US airline, becoming the first low-fares airline to top the US Department of Transportation's list.
AirTran also made steps as the new quarter began: it will offer the first ever low-fares competition to Delta on the lucrative route between Atlanta Hartsfield and Reagan National Airport, using slots it won at the Washington airport.
With its return to profitability and expansion, America West has enlarged the sector. It posted a second quarter profit, its first since the end of 2000, and the first earned by a carrier that has tried the often fatal conversion from traditional pricing to a structure based on "everyday low fares".
America West puts its success down to their new fares structure, under which they do not respond to every competitor's pricing initiative. This summer, they declined to offer cut-rate fares that made little financial sense.
By August, America West had said it would enter the transcontinental race, taking on the network carriers with non-stop service between Boston Logan and New York JFK in the East and San Francisco and Los Angeles in the West. Gary Chase, analyst at Lehman Brothers reckons that American, Continental, Delta, and United derive $1.3 billion in these four "flagship" markets.
In general, Chase sees a trend of "gradual revenue improvement", mostly due to reduced capacity, which was down by some 8% in the June quarter. He believes that domestic demand has also returned to pre-Iraq war levels. But no-one is too optimistic about a return of revenues going into autumn's slowing travel season. Says Delta president Fred Reid: "We know that fall is coming."
Source: Airline Business
