US airline profits slump as economic woes take toll on business travellers

PAUL LEWIS / WASHINGTON DC

Major carriers put brakes on growth as traditionally strong quarter falters, but Southwest and AirTran buck trend

A combination of falling yields from the drop off in business travel and high overheads from persistently elevated fuel prices, exacerbated by rising labour costs, has resulted in a financially dismal first half for all but three of the USA's major airlines.

For only the third time in the last 30 years the US airline industry lost money in the traditionally-strong second quarter of the year. With none of the major carriers having seen any improvements in high-yield business travel bookings, most have begun to rein in capacity growth.

"It was not an auspicious first half and if we don't see any improvement we are going to see considerable consolidation and more cuts in capacity," says George Hamlin, senior vice president at Global Aviation. Airlines have begun to trim fleets with the early retirement of older less fuel efficient aircraft, with the next impact likely to hit Boeing and Airbus single-aisle production.

Northwest Airlines moved immediately to counter losses of $55 million for the quarter compared with a profit of $155 million last year by cutting its payroll numbers by 1,500 and cutting capacity growth plans by up to 5% over the next six months. Around 500 staff, including 130 managers, will be laid off, the rest will go through early retirements and attrition.

Delta Air Lines, which lost $123 million, plans to phase out nine Boeing 737-300s in 2002, in addition to the 10 aircraft it announced in June it would retire this year. American Airlines has said it will not be exercising any more 737-800 options in 2002/03 after announcing a second quarter loss of $105 million.

American Airlines, like most other major carriers, was adversely affected by declining business travel and fuel costs despite a 11% hike in revenue to $5.6 billion resulting from the purchase of Trans World Airlines. American chief financial officer, Tom Horton, says: "The drop-off in business travel was so sharp that, to me, it signals that the economy may be in worse shape than we thought."

United Airlines posted a larger than expected loss of $292 million, after being hit by weakening Asian and US West Coast traffic. This is expected to widen by $116 million if its proposed merger with US Airways ultimately fails.

Bucking the trend was Southwest Airlines, which, as the result of its much lower unit costs and concentration on non-business class traffic, reported net income of $176 million, down only 6%. Alaska Airlines was similarly buoyed by leisure travel levels helping to mitigate a 80% drop in earnings. It turned in a $4.7 million profit. Continental Airlines offset a 72% drop in net profit to $42 million by cutting unit costs by 3.5 %.

AirTran Airways' comeback continues and while not yet qualifying for the tag of a major airline - defined as having an annual turnover in excess of a $1 billion - the pace of growth suggests it will achieve that goal next year. Total operating revenues for the quarter reached $205 million, 28% up on last year. Earnings hit $28 million before a charge related to 737 retirements and fuel hedging gains.

Joe Leonard, the airline's chairman and chief executive, said the results "demonstrate an improving business to leisure revenue mix, as well as a redirection of some business travel towards us in an uncertain economy".

The outlook the rest of the year for most airlines remains bleak, with the two largest carriers, United and American, not expressing any confidence that 2002 will be better. "Carriers can take steps to minimise losses, but the key question is what is the economy going to do," says Hamlin.

Source: Flight International