Excessive optimism that 2006 would see a return to profitability for the US majors has given way to a more tempered hope of transition towards black ink, with a few front-runners making a little money
With spring comes an early blast of reality, and that is the chilly front moving through executive suites, Wall Street and even the nation’s professional pundits as the year 2006 digs in with the vengeance of unshakeably high fuel costs, and last year’s deficits clearly are a sign of things to come in 2006.
As veteran securities analyst Ray Neidl of Calyon Securities puts it: “The Pollyannaish outlook recedes for now.”
Even if analysts are holding off on declaring this the year of profits, some are tentatively hoping that 2006 will be the year of transition, if not to industry profitability in the USA, then to profits at a few forerunners.
A look at the 2005 figures suggests that these winners will be the usual suspects: Southwest, American, possibly Continental Airlines, and possibly US Airways now it is combined with America West.
This hope is pinned on these facts: For the first time in more than a decade all of the industry’s key economic drivers – supply, demand, and costs – are moving in the right direction. So after a year of still more huge collective losses, the view is that 2006 will be a better year. For once, the travelling public that for years rebelled at attempts to boost fares – even by a paltry $5 – seemed willing to accept several rounds of fare increases. Unit revenues rose about 6% in 2005, and bullish JP Morgan analyst Jamie Baker expects it to rise another 12% this year in domestic markets, and 7% overall. Baker believes the economy will continue growing at or near its current pace throughout the year, creating the leeway to bump up fares without driving away customers.
Surveys early in the year suggested that business travel spending was poised to rebound from Spartan limits and that individual flyers are clearly willing to spend more on air travel. On a route-by-route basis, business fares rose by some 17% year-over-year in late January, while leisure fares were down only marginally, according to Cathay Financial’s Susan Donofrio.
In fact, the revenue trends at the forerunners are impressive, and at US Airways for one have been up by year-over-year revenue performance, continuing to exhibit strong results, with mainline unit revenues estimated to be up in excess of 15% for both west and east networks in January.
At Continental, unit revenues rose constantly through the year, while at American, fourth-quarter revenue per available seat increased 13.8% year-over-year; the company added, with yield, representing average fares, up 8.5%.
One company that is devoutly hoping for passenger willingness to pay a bit more is JetBlue Airways, long a darling of investors and still beloved of consumers. The six-year-old lost money in the fourth quarter, enough to push it into an annual deficit for the first time since it went public, and says it will probably lose money for all of 2006.
But founder David Neeleman says: “I feel our customers will pay us more to fly on JetBlue because we deserve it…Our customers love us. We have great market share. (But) we need to get another $10 or so per ticket”.
Cautious JetBlue
Neeleman says JetBlue will be cautious about capacity increases but is committed to its Embraer 190 100-seater expansion. The 190 has had teething troubles.
Overall, domestic capacity could fall by as much as 5% this year, as the US majors shift significant portions of their fleets to overseas routes, estimates Fitch Ratings analyst Peter Stettler. At United, overall capacity was flat, pushing mainline passenger unit revenue up 12% as yield increased 8%, compared to the fourth quarter of last year. United’s efforts outperformed the industry average improvement by one point. American, a leading capacity cutter, for the full year posted a $100 million operating profit (excluding special items), while Alaska, Continental and Southwest also made operating profits. However, at the net level, American made an $861 million loss.
With fuel adding about $1.7 billion to its cost structure for the full year, chief executive Gerard Arpey said: “We did make progress in a number of important areas during the year, including our first annual operating profit, excluding special items, since the year 2000.” ■
DAVID FIELD / WASHINGTON
Source: Airline Business
