Another first quarter in the red is renewing the charge for profitability at US carriers, writes Lori Ranson
US major airlines continue to trumpet their capacity discipline, despite the beginning of a major recovery in revenue during the first quarter of 2010. There is also a new urgency among those carriers to clean up their battered balance sheets and find meaningful ways to give their shareholders a return on investment.
The continuing caution against increasing capacity too quickly is likely grounded in the reality that every US major posted a net loss for the first quarter, even as mainline passenger revenue per available seat mile for most carriers grew north of 5%.
United Airlines led the pack with a 19.3% surge in mainline passenger unit revenues. Elsewhere, Southwest, Alaska, Hawaiian Airlines and Allegiant Air all posted profits in the seasonally weak first quarter.
Fuel expenses and non-variable costs related to capacity reductions pressured overall costs for US airlines during the first quarter. But executive management teams at those carriers remain squarely focused on finding ways to strengthen revenue and keep costs in check to achieve elusive long-term profitability in the industry.
"I think we are very, very focused on profitability and in a way that is prosperous," says Southwest chief executive Gary Kelly. "We haven't met our return on capital in a decade, and that's just not acceptable to us. I think we all know why and we all know what the history has been, but we are working as fast as we can to restore those proper margins." Kelly warns Southwest, which in 2009 instituted the first capacity cuts in the carrier's history, needs to be cautious about expansion. "We may add five airplanes next year. But in terms of getting back to annual growth of 20 units a year, I just don't see that being on the cards for us unless we're hitting our returns," Kelly says.
CAPACITY DISCIPLINE
SkyTeam carrier Delta Air Lines also remains steadfastly cautious about capacity expansion. Chief executive Richard Anderson stresses the airline continues to be disciplined about its capacity, while putting a premium focus on de-levering its balance sheet, which shows roughly $16 billion in adjusted net debt.
"We believe capacity discipline is important and we'll keep it in check," warns Anderson. Delta's capacity in 2010 should remain relatively flat compared with 2009, even as a net 71 aircraft exit the carrier's fleet.
Delta also expresses a fierce commitment to strengthening its fundamentals with a stated goal of generating a 10-12% operating margin for the business. It also expects to post an 8-10% margin for the second quarter. At the same time Anderson says Delta "has got to get less debt on the balance sheet. It's what we're focused on."
Management at Continental Airlines is expressing similar sentiments about keeping capacity in check, admitting that in the past the company has committed to "spooling up utilisation and capacity too quickly relative to demand and pricing", says chief executive Jeff Smisek. Continental currently expects consolidated capacity growth in 2010 of 0.5-1.5%. "I will tell you we are focused on capacity discipline here," says Smisek. "We want to make money."
Low-cost carriers AirTran and JetBlue, which stunningly posted profits in each quarter and the full-year of 2009, posted losses of $12 million and $1 million, respectively, during the first quarter. Yet, despite those losses, each carrier is planning near-term capacity increases. AirTran estimates a 4% capacity rise in the second quarter, followed by a 2% increase in the third and fourth quarters. JetBlue plans capacity growth of 6-8% in 2010, as it plans to add seven Airbus A320s it previously owned back to its fleet through leasing deals with US lessor GECAS. That is in addition to four Embraer E-190s joining its fleet in 2010.
JetBlue chief executive Dave Barger stresses the seven A320s overall are driving modest capacity growth and explains, given the favourable lease terms on the aircraft, they will "support profitable and important growth opportunities in our network". Through a larger partnership in development with oneworld alliance partner American Airlines, JetBlue has acquired eight slot pairs at Washington National Airport and intends to launch new flights to Boston, Orlando and Fort Lauderdale in November. "Success in key markets such as Washington National will require incremental aircraft for optimal scheduling," Barger explains.
Analysts at Raymond James say JetBlue's build-up in Boston is driving its decision to add the Airbus narrowbodies. "Given the desire to have attractive, prime departure times, this expansion cannot be easily supported by increased utilisation flying. Further, JetBlue does not believe it should prune capacity from other existing markets to support this expansion." JetBlue, starting in the summer travel period, plans for a 30% increase in its daily departures from Boston.
CLIMBING TO THE PEAKS
The significant strides both mainline and low-cost carriers made in revenue in the first quarter were somewhat tempered by year-over-year comparisons that saw dramatic declines beginning in the first three months of 2009; and, for many carriers, revenues remain below 2008 levels.
But most US majors believe continuing demand momentum and pricing traction are helping to accelerate unit revenues returning to the favourable levels they achieved two years ago. Star Alliance carrier US Airways for June expects a unit revenue improvement of 20% year-over-year, and president Scott Kirby declares: "We are getting close to the 2008 levels of both yield and business demands."
Barclays Capital analyst Gary Chase estimates United Airlines should post a 26% year-over-year unit revenue improvement during the second quarter. For the first quarter of this year United Airlines president John Tague says yield on premium cabins in international markets grew 20% year-over-year. This helped to drive a 40% improvement in premium cabin unit revenue.
US carriers are particularly encouraged by favourable pricing trends. JetBlue's average one-way fare price during the first quarter was $142, "our second highest quarterly average fare ever", says Barger.
American's chief financial officer Thomas Horton explains that fewer fare sales are now occurring in the US market, while "at the same time the industry is having more success in raising fares". Over the first three months of 2010, Horton says about two-thirds of fare increases were partially successful.
But uncertainty over fuel costs is looming large as fuel prices could reach $90 per barrel in the back half of the year. "The issue we have ahead of us is fuel. It's been pretty volatile," says Delta chief Anderson.
Horton of American admits while the airline's unit revenues have nearly returned to 2008 levels, the "high fuel prices and increasing costs overshadowed our progress" during the first quarter of the year. He estimates American paid $210 million more in fuel during the first quarter than the carrier would have done based on lower prices of fuel during the year-prior.
But even as fuel price volatility lurks to potentially spoil the progress US airlines are making in rebuilding revenues, two carriers have declared they will post profits during the second quarter.
Anderson of Delta proclaims the SkyTeam carrier will "be solidly profitable in the June quarter". Meanwhile Doug Parker, chief executive at US Airways, says the carrier's expected profit for the second quarter will be its first surplus, excluding special items, since the third quarter of 2007. "So we are very pleased with our progress and the momentum we have going forward," says Parker.
Source: Airline Business
