Elsewhere, however, there remains a good helping of the record profits and soaring load factors that have characterised the late 1990s. The smaller, domestic carriers have fared particularly well. So, too, have some of the giants, especially American Airlines and Delta Air Lines. Costs have been kept under control. And, considering the pull-down effect of the TWA and Northwest losses, the overall picture has remained stable.
But few in the industry, either airline chairmen or financial analysts, were ready to start popping the champagne corks. The next downturn is out there, somewhere, in the not too distant future. There are signs of a plateau having been reached. Most of the majors witnessed a softening of prices in the fourth quarter. There are indications that the transatlantic market is becoming saturated as each of the carriers transfer their surplus aircraft from the Asian markets. The Latin American market will remain uncertain in 1999. And Wall Street will be keeping a close weather eye on those falling yields.
The falling yields and trailing off experienced by several carriers in the fourth quarter has already raised some concern by analysts who believe that conditions this year can only get tougher, with more competition and a jump in capacity as the US economy feels more directly the effects of the Asian and Brazilian crises. The pessimists believe industry-wide profits could fall by 12% or more this year. Of special concern is the intense competition that has developed in the east coast market and which is also taking hold over the Atlantic.
But others paint a brighter picture, basing their optimism largely on the more disciplined approach of senior management that might also be regarded as a theme of the late 1990s. "These new, cost-conscious airline managers are definitely an issue as we look to a weaker environment," says Jim Higgens, analyst at Donaldson, Lufkin & Jenrette. Like other analysts, Higgens is waiting to see whether this new breed of managers, once the going gets tough, will resist the temptation to fall into a fare wars scrap and chase market share at the expense of profit. Even the optimists, however, believe that 1998 was probably the last year in this cycle of record profits. But they point out that the airlines have their costs under control and are showing a much more conservative approach towards their older aircraft, holding on to them as buffers against a recession.
The big three profitsOf the big three, Delta has most to celebrate. The first full year results with president Leo Mullin at the helm, Delta's net income has broken through the $1 billion barrier. The airline also ended 1998 with records in revenue, operating margin, cash flow, load factor and number of passengers carried. Unlike most of it competitors, Delta has also scored a good fourth quarter, with its earnings exceeded Wall Street's expectations. That prompted prompting Mullin to comment: "The December quarter results demonstrate significant achievements for both our customers and our shareowners." Yields are down for the year, but only fractionally.
American similarly has reason to look back on 1998 with a smile. Profits sored past the $1 billion mark in style, as the group posted year-end net earnings of $1.3 billion, up by a third. American's fourth quarter, however, tailed off, with earnings and profits both down by 12%.
The airline picks out falling yields due to softer prices - especially in international markets - as the main reason behind the drop. December quarter yields fell by 5%. "What we are seeing is weaker economies and more capacity, which has pushed down fares," says American's chief financial officer Gerard Arpey. There will be continued pressure on unit revenues in 1999, predicts Arpey, because the airline believes capacity will rise by more than 5%.
United's senior vice president of planning, Rono Dutta, has similar concerns. "In the second half of December, the yield picture was very gloomy," he admits, adding that yields will be the all-important factor to watch in 1999. United's yields are down 2% for the year and down 3% for the fourth quarter.
United's figures are, as ever, complicated by the impact of its employee share ownership scheme, included for the purposes of USGAAP. Excluding this, however, the group's underlying earnings stood at $1.3 billion by the end of last year. Although handsome enough, that failed to match the heights of a year ago when the net had risen above $1.5 billion.
Asia was the chief thorn in United's side in 1998, although there were signs of improvement as the year progressed. Revenues were down in Asia by 13% and 18% in the second and third quarters, although the year-on-year decrease narrowed to just 6% in the fourth quarter. United is reluctant to believe the crisis is over, but says those figures give reason for some optimism. In the meantime, the airline is reallocating eight Boeing 747-200s from Asian routes and putting them on strong US domestic hub-to-hub routes such as Chicago-Washington D.C. and Chicago-Denver. It is also adding transatlantic services, although it admits that increasingly fierce competition in that market as airlines scramble out of Asia will put pressure on yields.
Continental Airlines too boasted another year on the fast track. Although the net figure was static, the airline posted its fourth consecutive year of record pre-tax profits. Despite another year of double digit growth it has maintained operating margins at better tha 10% and a record load factor of 72%.Yields, however, are down over 2% and by almost 5% in the fourth quarter.
TWA and Northwest woesSet against the generally positive figures of the other majors, the 1998 results of Northwest and TWA look particularly bleak. TWA's struggle to find a firm footing continues. "We must address overhead issues such as infrastructures in countries that we serve overseas," says TWA chairman Gerald Gitner, surveying a another operating loss of $29 million - or $65 million after special charges to cover excess overheads and the fleet renewal programme.
Northwest, meanwhile, faces its own uphill battle in 1999 after a 1998 full of woes that included a 15-day pilot strike (see feature, page 68). The airline's losses stand at $286 million, of which $181 million accumulated in the fourth quarter alone. Northwest insists the results are in line with its expectation, but says it has yet to recover all the business travellers it lost as a result of the strike. First quarter 1999 figures are also likely to be bleak, the airline warns. On top of the effects from 1998, Northwest will have to take into account a severe New Year ice storm that played havoc with its scheduling.
Another strike-hit carrier that was similarly effected by the ice storm - Air Canada - posts net losses of C$16 million ($10.6 million). The airline has embarked on a restructuring programme that will include staff layoffs.
Year-end comparisons for US Airways were complicated by the massive tax credit that inflated the 1997 figures - It had used a credit of $467 million, only partially offset by a $125 million extraordinary charge. Stripping out those items, 1998 net income was down but the operating margin shows the carrier's underlying strength.
The year also began to show the strength of the smaller, more nimble carriers. The Alaskan Air group, America West and Southwest Airlines all have strong showings, as does Denver-based startup Frontier Airlines. Phoenix-based America West, which not so long ago had a shaky future, is now attracting attention - some of it uncalled for. United's admission that it has expressed an interest in acquiring America West was neither "solicited or invited", says America West's chairman William Franke. Instead, the airline is concentrating on what it describes as a "fantastic year" in which it saw a record fourth quarter and year. In contrast to the majors, and after a concerted effort, the group's yields were up 4%.
There is optimism too that the regionals can keep their stellar growth rates rolling, even with a general downturn in prospect. Typical of the regional industry's 1998 performance - and adding weight to the opinion that these carriers are now significant players in their own right -are the results of Atlantic Coast Airlines (ACA). It saw net income more than double.
Overall, even allowing for the downsides, the 1998 figures add up to some heady stuff. They should put the majors in good shape to weather the road ahead provided the same conservative styles of management are maintained.
US major airline scheduled passenger traffic - Year 1998| Airline | Traffic (RPK) | Capacity (ASK) | Load factors | Passenger yields | Seat costs | ||||
| millions | change % | change % | % | change | c/RPK | change | c/ASK | change | |
| United Airlines | 200383 | 2.6 | 2.9 | 71.6 | -0.2 | 7.68 | -1.5 | 5.44 | -2.0 |
| American Airlines | 175217 | 1.8 | 0.9 | 70.2 | 0.6 | 8.38 | 0.9 | 5.75 | -0.2 |
| Delta Air Lines | 166271 | 3.7 | 2.4 | 72.7 | 0.9 | 7.95 | -0.5 | 5.51 | 0.2 |
| Northwest Airlines | 107382 | -7.3 | -5.8 | 73.1 | -1.2 | 7.00 | -7.0 | 5.72 | 6.7 |
| Continental | 86739 | 12.5 | 10.6 | 72.1 | 1.3 | 7.85 | -2.6 | 5.55 | -1.5 |
| US Airways | 66376 | -0.8 | -2.7 | 72.7 | 1.4 | 10.58 | -0.5 | 7.67 | 0.1 |
| Southwest Airlines | 50553 | 10.8 | 6.9 | 66.1 | 2.3 | 7.84 | -1.7 | 4.55 | -1.1 |
| Trans World Airlines | 39295 | -2.7 | -5.4 | 70.9 | 2.0 | 7.36 | 1.7 | 5.74 | 2.8 |
| America West | 26340 | 1.0 | 3.1 | 67.3 | -1.4 | 7.05 | 4.2 | 4.52 | -0.7 |
| Alaska Air | 18154 | 8.6 | 8.9 | 67.1 | -0.2 | 7.77 | 0.1 | 5.08 | -4.0 |
| TOTAL | 936713 | 2.2 | 1.6 | 71.2 | 0.4 | 7.98 | -1.2 | 5.63 | 0.0 |
NOTES: Seat costs exclude ESOP schemes, restructuring changes etc.
RPK=revenue passenger kilometres ASK=available passenger kilometres 1mile=1.609km.
Source: Airline Business
