Kevin O'Toole/LONDON
THE MAJOR US AIRLINES have followed up their latest round of record profits with predictions that their spectacular performances will continue into the second half of the year.
The airlines turned in their best-ever net profit - of more than $1.5 billion - in the second quarter, despite some lingering restructuring charges.
United Airlines and American Airlines, which led the latest profits haul, both hint that there is better to come in the third quarter, traditionally the industry's strongest. Airline analysts have already raised their forecasts for United, suggesting that its net profits will break through the $400 million mark in the third quarter. The airline says that it should "-comfortably exceed" that figure.
American also promises that it is "capable of more", and seems reasonably confident of bettering analyst forecasts of a third-quarter result above $325 million.
Behind the optimism is a mini-boom in the US passenger market, with the network carriers making dramatic gains in traffic and yields throughout the second quarter.
United says that its domestic yields were up by a record 8.5%, while its low-cost Shuttle operation swung back into profit with an unprecedented 17% rise. The system-wide figure was only lower because of the impact of a slighly weaker Japanese yen on Pacific services, an effect also experienced by Northwest. Carriers such as Southwest and USAir produced yield gains in the 6-8% range on their largely domestic networks.
Airlines admit that help has come from the lapsing of the US ticket tax, used to fund US air-transport infrastructure. The tax, or its equivalent, must eventually be re-imposed, but will require major legislation - which is now unlikely to take place before the US presidential elections.
The boom for the network majors has also coincided with a pause in the spiralling growth of the low-cost start-ups following the ValuJet crash. Although there is no clear evidence of any lasting damage, ValuJet has been taken out of the market for the time being and others have had their wings clipped a little.
The big airlines themselves have been indulging in a bout of low-fares deals over the US summer. The fares war was sparked off by $25 one-way deals launched in July by Southwest Airlines to mark its 25th anniversary. In the first two weeks of the sale, the carrier got through 4.5 million tickets and says that bookings would have been better but for congested telephone-switchboards. Other carriers have been quick to match the offer.
The sales have been highly controlled, and, in general, fares have been on the rise, helped by signs of a return in premium travellers.
Continental attributes its dramatic second-quarter turnaround to the return of high-yielding business traffic, while America West used some of its new-found cash to install first-class services across its whole fleet.
Unit costs have also been on the rise, although, in part, that has come as a consequence of booming traffic, alongside the imposition in 1995 of the aviation-fuel tax. With restructuring plans now largely complete, the focus has switched from containing costs towards making the most of the boom.
Delta Air Lines provides the clearest example. Over the past two years, the group has ruthlessly pursued a goal of bringing costs down to 4.7¢ per seat kilometre (or 7.5¢ per mile) by mid-1997. Chairman Ron Allen admits that the target will not now be reached, arguing that the market has changed and that Delta will take "-more measured systematic steps to reduce costs permanently".
Allen adds that the ultimate cost goal still stands, "-but we won't penalise our overall financial performance to do it". He says that the unit-cost target was "never an end in itself", and that the new goal will be to achieve a 12% operating margin over the next year.
In the first six months of this year, Delta has already managed to achieve a 10% margin, excluding the $829 million put aside to cover restructuring. That includes the $273 million provision in the second quarter to pay for the early retirement of 500 pilots, agreed as part of the four-year union deal settled in April.
Meanwhile, the effort to repay debt and repair balance sheets is being stepped up. Over the second quarter, the groups used their profits to cut debts by at least another $1.5 billion, through a mix of early repayments, buy-backs and aircraft refinancing.
These measures will produce their own savings. United expects that its debt reduction over the past year or so will shave $100 million off its annual financing bill. Even Continental, which was struggling a year ago, now has $825 million in cash and has raised around $1.5 billion through refinancing deals since November, helping to shave its annual bill for interest payments and aircraft rentals by $74 million.
Even Trans World Airways (TWA), the weakest of the majors, has doubled its cash balance over the past year, to reach $304 million in June against debt of more than $1 billion. TWA's plans to raise another $183 million through a share flotation looked promising before the recent Boeing 747-100 crash forced the airline to delay the launch. The full impact of that catastrophe remains unclear, but, as one credit-rating agency comments, TWA is in better shape to cope with it than at any time since the late 1980s.
Source: Flight International
