US airlines are back in profit, but the lessons of recession linger on.
Kevin O'Toole/LONDON
THE NOTORIOUS business cycles of the airline industry have at last come full circle for the US carriers. Just two years ago, three of the majors were fighting their way out of Chapter 11 bankruptcy protection, and a couple more looked ready to join them. Yet 1995 has closed with a string of record profits and optimism of better to come. The question now is how long this good news will last.
The 1995 performance is certainly cause for cheer. Net profits for the largest US groups ran to around $1.8 billion and would have looked better still except for a round of heavy charges to cover restructuring and employee share-ownership programmes (ESOPs).
Workers received ESOP and profit-sharing payments of more than $1 billion over the year, while restructuring charges - mainly to cover retirements at American Airlines and financial re-organisation at Trans World Airlines - ran to another $775 million.
Without these charges, United, Northwest and American would all have topped the $500 million net profit mark. Delta did produce such results, but its charges have yet to come. The carrier warns that it will have to put aside as much as $650 million to cover the costs of job cuts and write-downs on 56 Lockheed L-1011s destined to leave the fleet.
Inveterate loss-makers such as USAir and Continental produced respectable returns, too. To underline their renewed confidence, Continental's top-management team announced that each was to buy up $100,000 of stock.
Only TWA, fresh from its second bout in Chapter 11, managed to show a loss. It, too, has plans to make capital out of its cost-cutting in 1996, brushing up premium services and spending $1 billion on aircraft renewal.
Even the usually cautious debt-rating agencies have begun talking up the market. Moody's, one of the world's leading rating agencies, started the year with a forecast that the world airline industry as a whole is on course to regain an investment grade rating. Northwest, which once languished with no more than a junk bond rating, has already been upgraded and others could follow.
The optimism comes with qualifications. The massive debts built up during recession need to be repaid. Moody's reckons that it will take at least another two to three years for the industry "to restore some meaningful health" to balance sheets.
There are signs of progress, with early debt repayments and preferred stock repurchase much in vogue over the past year. United alone has pushed through more than $2.6 billion in debt retirement and credit improvement since it became employee-owned 18 months ago. Northwest, too, has paid off the last of the loans used to privatise the company in 1989.
Repairing balance sheets still remains a priority. Before the end of the decade, most of the carriers face expensive fleet-renewal programmes, not least to meet new noise-regulations. With the possible exception of Southwest, which has nearly $800 million in unused cash and credit, few have the funds to do that with comfort.
Another possible cause for concern is that the US recovery has come despite, rather than because of, any dramatic rise in traffic. Last year produced only a modest 2.4% growth in passenger numbers for the major US network carriers, and much of that stems from a good performance in the first half of the year.
The real success has come from keeping down capacity, which edged up by only 1% in 1995, and staying in control of unit costs. With over-capacity beginning to ease, carriers have in turn been able to push through a modest, but badly needed, rise in fares. Yields over the year grew by 3%.
The fear is that this good work could quickly be undone if traffic growth begins to falter, or airlines release the downward pressure on costs. The good news is that airline management show few signs of relaxing their cost-cutting efforts. They could, however, face renewed pay demands from their (for now) subdued unions once the "carrot-and-stick" technique of profit sharing and job losses begins to wear off.
The growing threat from low-cost competitors is also likely to make a bigger dent in traffic and fares over 1996, although arguably this last factor could actually work in favour of the majors, by keeping management on their guard.
Delta provides a good example. Chairman Ron Allen says that the headlong drive to bring seat costs down to ¢7.5 per seat mile (¢4.7 per seat kilometre) is being sharpened by pressure from "low-cost competitors in the core of our operation" - Atlanta, Georgia-based ValuJet cannot have been far from his mind. This threat could help rather than hinder, as Delta picks its way through negotiations, on cost cutting with its pilots.
Moody's forecasts overall that world airlines, US carriers included, have another two years or so until they face the next downturn. The airlines have until then to make good.
Source: Flight International
