For the first time in five years, the US majors posted a collective quarterly net loss in the three months to December. Admittedly the loss was a modest $30 million and actually translated into a small profit excluding some exceptional items (see table below). Financial analysts also point out that such losses were routine in the December quarter until the current boom took hold. Sam Buttrick of UBS Warburg, calls the loss "more of a headline for the popular press than anything of financial import".
However, everyone is keeping out a weather eye on the year ahead. Wall Street warns that rising labour costs and declining business travel could hurt full-year profits in 2001.
Net profits were already down by some $500 million for the year in 2000, even excluding some of the exceptional costs bound up with labour and restructuring. In the fourth quarter operating margins sank to only 1.4%.The risk ahead is that yields will start to fall back if and when economic slowdown begins to work through into tighter corporate travel budgets. Buttrick notes that "corporations continued to spend with relative indiscretion" in the last quarter and that the US industry pushed through the last two of six fare increases for the year.
Costs in the quarter were not helped by a mix of bad news on fuel, labour and weather, points out Brian Harris of Salomon Smith Barney. So although yields grew, seat costs rose by twice as much, with some hefty double digit hikes at the likes of American and United Airlines. Rising fuel prices added over $1 billion in cost during the quarter.
The year ahead
Looking ahead Buttrick views 2001 as: "A mixed year for airline fundamentals with an unusually wide range of possible outcomes. On the plus side, system capacity growth should remain in benign territory with growth forecast around the 3.5% level, not remarkably different from the 3.1% capacity growth of 2000."
On the plus side, Buttrick further believes that oil prices have also receded nicely. "Lastly, the industry continues to benefit from lower distribution expense as customers increasingly choose the more efficient Internet as a preferred booking method," he adds.
But there are concerns too, not least that that corporations will indeed start to spend "more judiciously" on air travel in 2001 against the backdrop of more conservative forward planning.
Yet Buttrick is still relatively bullish on the revenue side, forecasting another year of 7% growth in 2001 despite an outlook in which the economy could grow by only 2%. The cost side is less optimistic. "Labour expectations, following a comparatively generous United pilot settlement, are, frankly, out of control," he says, noting that labour costs rose 12% in the fourth quarter and will likely rise 14% in 2001.
Overall, Buttrick predicts: "The combination of a slowing economy, corporate travel cutbacks, excessive labour expectations and consolidation integration costs could prove to be a lethal one for airline profits in 2001."
Capacity is a concern of Michael Linenberg at Merrill Lynch. He points out that more than one of the majors indicated in the fourth quarter that they were starting to see a decline in premium traffic bookings. And that capacity growth is starting to be raised as a concern for later this year. "Our 2001 system capacity growth forecast starts at 2.5% in the March quarter, rising to 5% by the December quarter. Those capacity additions could prove to be too much if economic growth remains in the 2-2.5% range for 2001," he says.
In the first quarter, Harris predicts that unit costs will rise 5.5%, down from the December quarter. He also expects unit revenue to rise, but only by 3.5%.
Longer-term, revenues are Harris' prime concern: "The gap between business and leisure fares has risen over the past year, and the projected economic slowdown creates a scenario conducive to a potential business buy down effect, business travellers finding ways around high fares and corporations cracking down on travel policies". Although December revenues were strong, he notes that airlines tend to be lagging economic indicators due to the "scurry effect". Harris explains that business travel tends to rise in the beginning of an economic slowdown, perhaps as more salespeople travel to try and "get their numbers up".
Philip Baggaley, who follows airlines for rating agency Standard & Poor's, also highlights revenues and labour as the key issues this year. "Airlines claim passenger revenues haven't begun to weaken, but I think it's inevitable with the slowing down of the economy," he says.
Baggaley also warns that labour costs are "going through the roof", with unions demanding higher wages as the industry faces a downturn. The merger and acquisition activity is a "big wild card" he says, pointing to problems already caused at United as it gave its pilots a new contract in order to help gain their co-operation on any future integration with US Airways. He points out that even if there are no mergers "the damage has been done with higher labour costs".
Source: Airline Business
