Airlines Cruise to Profits With Newfound Strength
By SUSAN CAREY
Two years after U.S. airlines were pounded by soaring fuel prices followed by the recession, the industry appears poised to post its first meaningful profit since 2007's third quarter.
The major U.S. carriers will begin reporting second-quarter results next week, led by Delta Air Lines Inc. on Monday. Analysts expect all but one of the nine largest carriers—AMR Corp.'s American Airlines—to be in the black for the quarter and all of 2010, thanks to moderate fuel prices, an improving U.S. economy, fewer seats on offer and increased revenue from checked luggage and other optional services.
Analyst Michael Derchin of CRT Capital Group LLC even foresees a slight profit for American, although Wall Street's mean estimate calls for a quarterly loss of three cents a share. Mr. Derchin forecasts that the largest airlines will report net income of $1.7 billion in the June quarter, compared with a loss of nearly $1 billion a year earlier.
"Clearly, the economy is providing a considerable amount of lift for all...carriers," Delta President Ed Bastian said at an investor conference last month.
Still, nobody's breaking out the bubbly. That's because unit revenue—the key metric of revenue taken in for each passenger flown a mile—is only now approaching levels last seen two years ago. UAL Corp.'s United Airlines, which has been posting industry-leading unit revenue gains in recent months, said it rose 31% in June versus the year-ago month. Compared with June of 2008, unit revenue was up between 5% and 6%.
The Air Transport Association trade group says unit revenue for the 12 months ended in May was 10.9 cents for each seat flown a mile among airlines that report such data. In the same period ended in May 2008, the number was 11.5 cents, a sign the industry still is climbing out of a hole.
John Heimlich, the ATA's chief economist, sounded cautionary notes in a speech this week to the International Aviation Club. "Better does not equal good," he said, noting the high U.S. unemployment rate and the failure of U.S. gross domestic product to snap back to 2008 levels.
Fuel prices, while moderate, remain higher than last year, he said. Airlines have poor credit ratings and loads of debt. And the mature domestic market isn't likely to provide future growth opportunities.
Airlines are benefiting from a return of premium business travelers, who curtailed travel sharply during the depths of the recession, especially on international routes. Delta last month estimated its second-quarter unit revenue was 20% higher than a year ago, and its June unit revenue on Asian routes leapt 50% from a year ago.
The Atlanta-based carrier, the world's largest by traffic, said revenue from corporate contracts, which accounts for about a fifth of its total sales, was up 63% in May from the prior year.
Also helping are cuts that airlines have made to fleets and available seats. U.S. carriers are expected to deploy 8% less capacity domestically in the second half of 2010 than in 2007, according to Daniel McKenzie, an analyst for Hudson Securities Inc. Including overseas flights, carriers are flying 5% fewer seats overall. Airlines have dropped many unprofitable flights and don't have to fill planes with as many leisure fliers on cheap tickets.
Carriers also are raking in new revenue by imposing fees on services such as checked luggage, blankets, early boarding and seat selection. The federal Government Accountability Office estimates these fees brought in at least $3 billion last year. The ATA puts the figure closer to $5 billion when ticket-change and cancellation fees are added. Either way, it's a drop in the bucket compared with the industry's $155 billion in 2009 revenue.
Michael Linenberg, a Deutsche Bank analyst, estimates that United, Delta, Alaska Air Group Inc. and Southwest Airlines Co. will post double-digit operating margins for the period. Investors also seem upbeat, having driven up share prices for most big airlines since the end of 2009.
AMR seems to be the odd man out. Its stock has fallen about 11% since then, and most analysts don't expect it to be profitable for 2010. Mr. McKenzie of Hudson Securities said in a research note that he's beginning to worry AMR "may prove an earnings zombie over this next cycle," as the company struggles with high debt, labor conflicts and a fleet strategy that isn't as effective as those of rivals.
Gerard Arpey, AMR chairman and chief executive, said in an investor conference last month that he expects big payoffs from the company strengthening its market position in the four largest U.S. cities, along with its efforts to deepen its partnership with members of its Oneworld marketing alliance. Together, they should provide $500 million in annual cost and revenue benefits by 2012, he said.
Mr. Arpey said American's labor-cost disadvantage should ease as rivals reach new contracts with workers. And this week, the European Union granted American antitrust immunity to cooperate more closely with British Airways PLC and Iberia Líneas Aéreas de España SA across the Atlantic, a step that will give them the same benefits two other big airline groups already enjoy.
Write to Susan Carey at email@example.com