Major U.S. Carriers Raise Red Flags As Economy Sags

<B>Major U.S. Carriers Raise Red Flags As Economy Sags</B>

By David Jonas

The major U.S. airlines are beginning to feel the pinch of a slowing economy as corporations continue to limit their travel expenditures (BTN, Feb. 26), causing a degradation of the all-important business passenger mix. As a result, five majors issued profit warnings and weaker traffic predictions for the first quarter.

"In short, February was a bad month for the U.S. airline industry in terms of revenue generation, and March could be worse," said UBS Warburg analyst Sam Buttrick. "Anecdotal evidence unequivocally suggests that the corporate side of the revenue equation is suffering far more than the leisure side."

Delta Air Lines, in a recent filing with the Securities and Exchange Commission, said first-quarter operating revenue is expected to be negatively impacted to the tune of $350 million, as a result of a reduced flight schedule and "customer avoidance"--both related to a possible pilots strike. It also cited the current state of the economy, which "has resulted in weaker business traffic." In all, Delta expects its first quarterly net loss in six years to approach $100 million. Looking ahead, the aforementioned factors could lower Delta's second-quarter revenues by as much as $250 million.

Northwest Airlines spelled out a similarly ominous outlook in one of its recent SEC filings, stating that it will not meet financial expectations, "primarily due to the decline in business travel, which has had an adverse impact on yields and revenues." The carrier predicted a first-quarter net loss as high as $150 million. Northwest further pointed to weaker point-of-sale revenues in Europe and a "cautious" outlook in Asia, prompted by uncertainty in the Japanese economy.

Unlike Delta, Northwest did not cite its current labor unrest as a factor driving down revenues. However, it did detail a cost-cutting initiative that included a reduction in non-profitable flying, early aircraft retirement, deferred spending on advertising and other discretionary areas, and a 5 percent reduction in management payroll. New CEO Richard Anderson said officers and directors, including himself, would not receive salary raises this year. Companywide layoffs are not planned, but each department individually must decide by May 1 on cost reduction strategies, he said.


<B>US Airways First To Send SOS</B>

US Airways was the first to issue a profit warning for the quarter, telling the SEC that reactions by corporations to the tough economic conditions are diminishing its business travel revenues. Though many saw US Airways' statements as posturing in its attempt to be bought by United Airlines parent UAL Corp., UAL itself raised the red flag. Chairman and CEO Jim Goodwin, said, "We've experienced a decrease in our higher-yielding close-in bookings and, therefore, expect first-quarter results to be well below current Wall Street estimates." Prior to the statement, First Call consensus put UAL's quarterly loss at $2.82 per share. Furthermore, the company expects full-year financial performance to miss targets. As a result, UAL is taking steps to reduce companywide costs by $200 million, with certain passenger amenities possibly headed for the chopping block.

American Airlines parent AMR Corp. also submitted an SEC filing predicting lower-than-expected March traffic, prompted, in part, by the softer economy. It expects a "modest loss" for the first quarter. Wall Street analysts had expected a profit above 30 cents per share.

Despite diminishing business traffic revenues, both the airlines and corporate buyers said relationships have stayed strong. More so now than in the past, airline contracts are based on market share, with targets that, therefore, are less affected by the slowdown.

"The airlines are not going to their corporate accounts and whining about it this time around," said one corporate travel manager.