The major US airlines again surprised the markets with another record round of profits for the third quarter, including encouraging result from troubled Trans World Airlines, which now promises it has enough cash to carry it through the winter season.
There had been speculation that the unprecedented run of profits emerging from the USA was finally beginning to slow after some lacklustre traffic figures for July and August, but a fares rise in September, led by Northwest Airlines, helped the carriers end the quarter on a high.
The nine majors finally posted a collective net profit of $1.9 billion, their seventh consecutive quarter of profitability, well ahead of results a year ago, when the boom was in full swing. The latest result was boosted by gains from United Airlines and US Airways on the sales of their shares in the Apollo computer reservation system to Galileo, and its subsequent flotation, but the two airlines would have been marginally ahead even without this.
An indication of the strength of the market came from the upturn in fortunes for TWA, which was struggling to show profits even before the Boeing 747 crash in 1996 appeared to doom its attempts at recovery. The airline ended the quarter showing an operating profit of nearly $64 million. While modest compared to its rivals, this marks its strongest performance since 1989. That translated into a net figure of $9.4 million, although there was an additional $34 million provision to come.
The work of the new management in hacking out unprofitable capacity, including the Lockheed L1011 fleet, showed through in reduced costs and higher load factors, while yields strengthened markedly. The airline says that it still has a cash balance of $105 million and a positive net worth which should allow it to see it through the winter. Optimistically, TWA is also talking about "being in a good position to build cash reserves-as 1998 plays out".
The general consensus is for further improvements to come in the fourth quarter throughout the industry. United Airlines believes that it will "modestly exceed" the $180 million profit being forecast by analysts, which would put the airline on course for a year-end net profit in the region of $1.5 billion, excluding the costs of its employee share-ownership scheme. US Airways, buoyed by the recent signing of its long-awaited agreement with pilots, is optimistic that there is better to come, and Southwest Airlines is back in favour after showing good progress on costs and an impressive 7.5% rise in yields thanks to the fares hike.
Behind the optimism has been a solid performance in curbing costs - the quarter showing almost no increase.
In part, that was because of an easing in fuel prices from the massive hike in mid-1996. The consensus appears to have been that prices paid fell by around 6-7%, although the extent of the benefit depended on how heavily the carriers had been exposed to the rise in the first place. Northwest saw a 10% fall, while Continental Airlines, which had insulated itself from the worst of 1996's hike, reports that prices were static. The fundamental work in reducing unit costs and paying down debt over the past four years or so continues to show through.
Although costs have been creeping up as the carriers make the most of a booming market, there is little sign yet of overheating. Capacity edged up by less than 3% in the third quarter, and workforce growth has largely been in low single figures.
Continental, for example, promised to "continue increasing wages towards industry-standard levels", but went on to pledge to meet higher labour costs in 1998 by finding around $100 million in savings elsewhere, including lower debt payments and distribution costs. The airline also joined US Airways in reaching a tentative pact with its pilots union on 3 November, although warning that "significant issues" still remain.
If there are shadows over the performance, they have come from the economic dramas taking place in much of South-East Asia.
United and Northwest, which are most heavily exposed across the Pacific, both issued warning noises about the uncertainties in the region, including currencies such as the Hong Kong dollar, against which they are not hedged. Northwest points to the weakness of the Japanese yen as a factor in its falling yields, while the generally poor economy has discouraged leisure travel.
For the time being the shortfall is more than compensated by the continuing boom back home in the US market, which for the time being shows no immediate signs of a slow-down.
Source: Flight International
