David Field / Washington
Is this the way it was meant to be? Mergers were supposed to be a guarantee of failure and low-fare innovators were supposed to guarantee money makers. Didn’t happen. US Airways, the twice-bankrupt reincarnation of money-draining USAir and sometimes profitable America West, surprised everyone with strong revenue and traffic gains and a profit, while JetBlue Airways, beloved of those same investors, analysts and pundits, lost money for the second quarter in a row.
Tirelessly robust gains in yield and unit revenues, driven as much by consumer traveller eagerness to pay to fly as by capacity cuts, are behind the positive surprises. And while some analysts think that the capacity cuts alone are driving the recovery, others detect a much deeper level of economic strength that keeps flyers lined up ready to pay despite five widely imposed leisure-fare increases averaging $5 each since the beginning of the year.
As Doug Parker, chief executive of the merged US Airways told investors: “We just aren’t seeing resistance to higher prices.” Parker credits much of the gain to capacity pull downs, observing: “Some people don’t realise the value you can create when you get out of airplanes.” Unit revenues on the western or America West side of the house rose by 16%, continuing a strong trend begun before the September 2005 merger, while on the eastern or USAir side, unit revenues skyrocketed almost 28%, driven by high demand and some capacity drawdown in the east by Delta and the disappearance of Independence Air.
But US Airways was not alone in enjoying the longed-for experience of eager customers: at Continental, April unit revenues shot up almost 13% on mainline flights, year-over-year. Two major travel periods, Easter and Passover, pushed up April levels, but the non-holiday month of March also showed strong revenue gains, with Continental up more than 5% year-on-year.
In a sense, the bulls are catching up with the analyst and observers who seemed bullish before the fact. JP Morgan’s Jamie Baker has been talking up a revenue recovery for months. His optimism has in fact become forward looking: he rejects the common view that the “recovery grinds to a halt in 2007,” calling that “doubtful barring an economic or airline-specific shock”. Baker thinks that “even coupled with the least revenue improvement in four years, unit revenues are going to rise”.
Baker notes that March industry mainline revenue, at $6.29 billion, “represents a 25% sequential improvement from February, nicely ahead of the 21% average and the second largest March-versus-February improvement since at least 1995, and the best ever for a March without Easter. Given this sequential revenue acceleration, it is becoming increasingly clear that unit-revenue gains are not solely a function of capacity, with early-year fare increases likely to credit.”
The negative surprise, JetBlue’s second consecutive deficit, may have drawn wide investor attention, but most analysts think the six-year-old carrier is doing the right things: slowing down aircraft deliveries, selling some aircraft and focusing on revenue management. If anything, JetBlue is the exception that proves the rule: the recovery has started to begin, although it is well hidden by inexorably rising fuel costs.
Domestic capacity is falling for the near future. Flights for the collective summer months of June through August will average 196,072 per week, down by 4.0% against last year, according to the American Express Executive Travel analysis. Even low-fare capacity is down or flat, with flights off by almost 2% and seats flat at 1.4, says Janet Libert of American Express.
For the full year, Susan Donofrio of Cathay Financial, who sees growth only in international routes, reaching almost 8% for the year, with domestic industry capacity dropping by almost 2%, bringing the legacy group capacity cuts since 2000 to a noteworthy 23%, collectively. Only America West and United among the network carriers will grow this year, she predicts.
For these legacy carriers, April’s load factor was about 82%, and even those in bankruptcy saw the trend. At Delta unit revenues rose by 13%, even though the carrier’s operating loss was still significant, at $476 million. But at Northwest, where unit revenues gained 16%, the operating loss was only $15 million, a vast improvement over the loss of over $300 million in the first quarter of 2005, and tantalisingly close to breakeven.
Recovery fears
Sceptics remain, and among them Air Transport Association’s chief economist John Heimlich cautions that it is unwise to confuse large numbers of people flying with a recovery. Even with higher fares, full loads and cost cuts, the legacy carriers remain vulnerable to the multi-sided bludgeon of petroleum cost: they pay directly and they are more likely to suffer from a downturn in spending than the low-fare leaders.
And signs of waning consumer confidence emerged in mid-May with a noted index of consumer confidence from the University of Michigan showing the first evidence of a stay-at-home syndrome. Elsewhere, a leading gauge of spending showing that some shopping mall-type retail spending was off, a sure sign that petrol pump prices are having an effect.
There are other warning signs. The incipient recovery has already led to labour demands to share in the rising tide to make up for its recent sacrifices. At US Airways, within hours of word of the carrier’s strong first-quarter performance came a near-ultimatum from the Air Line Pilots Association (ALPA), with the chairman of the America West group, JR Baker, warning: “We will not be wasting time in negotiations on management’s unrealistic efforts to impose concessionary work rules while management enriches themselves at the expense of the very employees who are on the front lines every day working to make the new US Airways a success.”
Meanwhile, US Airways pilot group leader Jack Stephan warns: “Just as US Airways’ stockholders and executives are reaping the rewards of the new US Airways, the pilots of this airline fully expect to receive commensurate returns.” Labour has leverage, even at carriers in bankruptcy, as the ALPA group at Delta showed.
Although it remains unclear if a union can legally strike against a carrier under bankruptcy court protection, rhetoric remains legal. This was apparent with the highly public talk among Delta’s pilots of a strike if the bankruptcy judge allowed the airline to throw out its contract. It ended up costing the airline millions, Delta admitted this quarter. Still, the optimists note, talk is cheaper than cash, and cash is on the table and pouring in. ■
Source: Airline Business
