In some airline boardrooms, the champagne corks are finally popping. After years in the doldrums, the airline business appears to be on course to report record profits for the second year running. Still, in this business even the best news tends to come with a few caveats, and this initial review of carriers' performance for 1996 is no exception.
The improvement last year was driven by the US majors, which reported a collective 50 per cent increase in their net profits to $3.5 billion - excluding TWA's fourth quarter result, which had not been released at presstime. But the non-US majors failed to deliver a significant bottom-line improvement, based upon the selection of mainly part-year results available.
All airlines suffered from the fuel-price rises which plagued the industry last year, but the US majors enjoyed a unique boost from the withdrawal of the federal fuel tax for most of the year. Combined with the strong US economy, this produced solid demand, with the US majors' traffic jumping by 6.7 per cent. More important, capacity remained in check, enabling the majors to boost passenger load factors by 2.6 percentage points to almost 70 per cent.
The yield picture was less straightforward. USAir, Continental and United boosted their yields by 5 per cent, followed by American with a 2.1 per cent increase, but Northwest's and Alaska Air's yield rises were smaller and America West and Delta suffered declines in yield as a result of competition, in Delta's case from ValuJet before the latter's accident.
No US major achieved an improvement in unit costs, mainly as a result of fuel prices. American Airlines was typical in reporting a fuel-price increase of almost 20 per cent, to 68.2 cents per US gallon. Unit-cost increases ranged from Northwest's tightly controlled 1.4 per cent to USAir's whopping 11.3 per cent - which kept it well in the lead in unit cost terms, at 12.69 cents per available seat-mile, although this does include a temporary employee compensation plan.
As usual, the bottom-line results owed as much to financial items and special charges as they did to operating performance. Operating income at American's parent AMR Corp rose from $1.5 billion (before restructuring) to $1.8 billion. While American reported its first $1 billion-plus net profit, this was affected by three major below-the-line items: a $497 million after-tax gain on the Sabre initial public offering, a $230 million charge for writing down the Canadian Airlines shareholding, and an $89 million extraordinary loss from early debt retirement. Furthermore, comparisons are distorted by American's $533 million restructuring charge in 1995.
United's parent UAL Corp also claimed a $1 billion net profit, but this was before a $67 million extraordinary loss on early debt retirement and was on a fully distributed basis. UAL's employee owners are paid partly in shares, which will be issued during the course of the employee stock ownership programme, but under US accounting rules UAL has to include the value of these shares as an operating expense. This leaves the company with a 1996 net profit of $533 million, a 53 per cent increase on the 1995 result, boosted by a 35.5 per cent jump in operating profit to $1.1 billion.
Delta also achieved a 34 per cent increase in operating income, which reached $1.4 billion. But the Atlanta-based major took restructuring charges totalling $829 million in its last financial year, which ended on 30 June, depressing the carrier's calendar 1996 results.
While Northwest's load factor and yield improved by less than some of its rivals, the Minneapolis based carrier kept costs in check and achieved a record net result of $536 million. USAir's double-digit unit cost increase did not prevent it from increasing operating income by 36 per cent to $437 million and doubling its net profit to $263 million. However, USAir says its net profit was $515 million excluding the cost of the profit-sharing and stock option plans which compensated employees who took pay cuts in 1992 and 1993.
The 32 non-US carriers whose financial results are included here showed collective stagnation in profits last year. While some results include a complete financial year, most are half-year or nine-month results. Several majors - such as Korean Air, Iberia and Japan Air System - have not provided any financial reports for 1996 yet.
The European results are variable, with fuel prices, exchange rates and competitive pressures taking their toll against a background of less positive economic activity. In the first half Air France moved to a net profit as operating profits jumped 30 per cent. First-half losses at Alitalia and Austrian Airlines widened, and Lufthansa and SAS lost ground in the first nine months. Lufthansa suffered from overcapacity, higher fuel and pension costs, the fire at Düsseldorf Airport and overcapacity in the market. SAS capacity increase led to higher costs, yet yields declined partly as a result of stronger Scandinavian currencies. Swissair's operating profit rose 17.6 per cent, but currency effects and lower asset sales depressed the net result. British Airways and KLM moved ahead in the first half, but KLM was helped by a $173.5 million gain from selling Northwest preferred stock.
In Asia-Pacific, the prognosis for 1996 is the least positive. Cathay Pacific performed the best, with a 12 per cent operating profit increase and a $70 million gain from selling part of its Dragonair stake. But in a major setback, Singapore Airlines' operating profit fell due to fuel costs, currency effects and a soft cargo market, although its net result was rescued by an $87 million gain from aircraft sales. Other Asian carriers suffered various woes, from Air New Zealand's strong local currency to Malaysia Airlines' cholera outbreak, the Japanese majors' weak yen and EVA Air's poor domestic yields and high interest costs.
All carriers still face a tough task in 1997. Fuel prices remain high and all non-US carriers are vulnerable to exchange rate fluctuations. Europe's majors are suffering from a gradual increase in competitive pressure, while the Asian carriers are seeing upward pressure on costs as their economies mature and, in some cases, as the cost of operating at new airports takes effect. In the US, Wall Street would like to see higher profits, yet employees of profitable carriers like American and United are becoming restless and the ticket-tax windfall cannot be permanent. As the industry's performance improves, the task of improving it becomes all the more challenging.
Source: Airline Business
