Revenue surprises pleased many US carriers in the second quarter, but the bottom line was an unsurprising disappointment
Even though legacy carriers such as American Airlines earned unblemished profits unassisted by special charges during the quarter, industry losses approached a third of a billion dollars as fuel costs kept rising.
Revenue surprises came at Frontier, Continental, America West and even United Airlines. For example, Frontier’s revenues leapt by 23% – well ahead of forecast, pushing it to breakeven. As cost cuts finally began taking effect, numerous carriers, including American and Continental, slid into the black ink of profitability in the second quarter. And although the second quarter is normally the busiest season for US airlines, this year some strong revenue increases have been seen.
At America West, unit revenue growth was even stronger than chief executive Doug Parker had been expecting. AirTran Airways grew its capacity by a third, made a narrow profit and benefited from a pull back in the southeast by arch rival Delta Air Lines and by its own opportunistic challenges to troubled carriers such as Northwest Airlines. Overseas routes thrived, with Continental claiming to be growing faster internationally than any other carrier this year. Free of low-cost competition and overcapacity that continues to pressure domestic fares, overseas service is far more lucrative.
American, which has cut costs by more than $4 billion annually, was by the end of the quarter enjoying margins of 4.3% and posting its first substantial profits in 11 quarters. But that is a slim margin against the 7-10% pre-tax profits American needs to address its debt problems.
In the second quarter, it saw its fuel bill surge $434 million from a year before as its average price for jet fuel jumped 47% to $1.63 a gallon. Even that does not look so grim in the shadow of the $1.80 per gallon American expects to pay in the third quarter.
As fuel spiralled upward, it surpassed labour as the major cost category at some carriers such as US Airways. That was also the case at JetBlue Airways, where fuel costs rose 94% to $111.3 million while labour expenses increased just 26% to $105.4 million in the quarter.
One encouraging trend is a rise in leisure fares. By late summer these had risen steadily, says Susan Donofrio, airline securities analyst at New York-based brokerage the Fulcrum Group. She notes that transcontinental routes have shown strong increases in average fares.
A decision by Delta to lift a cap on most fares adopted in February gave some breathing room, letting the industry generate at least $300 million in additional revenues, calculates Calyon USA analyst Ray Neidl. And late summer trends were looking good with Continental’s unit revenues up in July by 4.5% to 5.5% following a 6% gain in June.
This year the deals of autumn began earlier than usual, with deeply discounted promotions to fill aircraft following the back-to-school rush. Helane Becker, an analyst at New York-based brokerage Benchmark, says of the sale that she “would have preferred the timing to be later in the summer rather than now”.
Executives made efforts to downplay expectations of a strong autumn season. At Continental, for instance, management took pains to point out that the carrier is still headed for a “significant” full-year loss.
DAVID FIELD/ WASHINGTON
Source: Airline Business
