Dragged down by the losses of three major network carriers in reorganisation, US airlines lost $2.6 billion in the third quarter. But revenues are rising as capacity falls, and some analysts are credibly optimistic
They say a rising tide can lift all vessels, but this autumn swelling revenues did not ride out the flood of red ink for US carriers. Nevertheless, last quarter’s surprise income trend has persuaded airline executives that this growth was no fluke, despite the continued shock of fuel costs.
Some normally sober observers confessed to rational optimism, if not outright irrational exuberance. In the summer and early autumn, revenue increases continued so strongly for most airlines that at Continental Airlines, chairman Larry Kellner says he is “surprised” by the continued upward trend. Despite this, he predicts a full-year deficit, because of fuel.
Some have taken the rise seriously, if not religiously. For instance, JP Morgan analyst Jamie Baker says the trends lead him to believe “it is time to genuflect”. Unit revenue for the industry’s October performance should show a domestic gain of nearly 15% (and 12% internationally), he thinks. The numbers are good, but more importantly, Baker says: “October represents the first month of significant domestic capacity contractions this year.”
By the middle of November, Baker was conservatively optimistic: “Make no mistake – we believe the industry has finally turned the long-awaited cyclical corner towards profitability, courtesy of a shifting supply curve, surging unit revenues and industry-wide labour cost reductions.”
The big winners will be Continental and American, say analysts. Continental’s profit of $61 million followed a second-quarter profit – its first quarterly profit since 2003’s closing quarter. And it came as Continental paid $124 million into its pension funds. Unit revenue and yields both rose by 5%.
At American, the largest and strongest holdout from the ranks of the reorganisers, fare increases drove domestic unit revenues, pushed by strength in its Chicago, Miami and transcontinental markets, up by 15% year-over-year on flat capacity. American chief financial officer James Beer also told analysts that “yield improvement in the quarter was much stronger than in the second quarter”, climbing 8% to 11.96¢. He says American’s unit-revenue growth, when adjusted for stage length and density, was outpacing growth at others such as the usual leaders Continental (up 10.3%) and Southwest (up 9%).
Even carriers that were hit hard by the weather prospered. Orlando-based AirTran Airways, a major force in the eastern half of the nation, posted revenue that was strong enough to draw a “wow!” from Merrill Lynch analyst Mike Linenberg. Total revenue soared 53% compared with levels a year ago, on a 30% capacity increase, but unit revenues were even more impressive, with passenger unit revenues up 16% compared with a second-quarter drop of 0.6%.
Even United, which marks three years in bankruptcy reorganisation this month, enjoyed an 8% unit revenue boost and an operating margin of 3.5% in an operating profit of $165 million. Of course, that pales in the shadow of United’s $1.8 billion in restructuring costs, mostly from lease charges.
By mid-November, Fulcrum Group securities analyst Susan Donofrio calculates that leisure fares increased by 16-23% year-over-year. JetBlue’s average price increase was 11% over the past 12 months. JetBlue just about made money in the quarter, albeit a relatively slim $3 million. However, it will probably post an annual loss, thinks Standard & Poor’s analyst Betsy Snyder. She cites JetBlue’s growing debt as it takes on new aircraft and more competition.
Delta Air Lines is a major capacity changer. It lost more than $1 billion in the quarter and is giving up aircraft and redeploying widebodies such as Boeing 767s to overseas routes, replacing them with 757s in a move to adapt its low-fare unit Song to long-distance domestic routes.
Raymond James analyst Jim Parker says Delta has shifted its competitive focus to JetBlue after many years of battle with AirTran at Atlanta. There Delta will take out 15% of its capacity in directly competitive markets, while on JetBlue’s New York JFK routes, Delta capacity is scheduled to increase 11% year-over-year by February.
Delta also stands to become a prime beneficiary of the bankruptcy and anticipated liquidation of Independence Air, says Parker. Derek Kerr, the America West veteran who is chief financial officer of the newly integrated US Airways, says that this round of capacity cuts is different because “in other downturns, these aircraft stay in the USA. Lessors now have places for the aircraft,” he told investors.
“The capacity cuts let us bring up prices,” says Kerr of the combined carriers’ year-over-year unit revenue increase of 11% in the quarter. JetBlue chief executive David Neeleman told analysts that even though revenue has risen, “it is certainly not enough to keep up with the pace of rising fuel prices”. Even if executives like Neeleman are trying to show restraint, the facts may lead others to a more optimistic conclusion.
DAVID FIELD/WASHINGTON analyses FABRICE TACOUN/LONDON
Source: Airline Business
