On the first business day of the year, West Texas
Intermediate crude oil opened at $91.30 on the New York Mercantile Exchange. On
the last day of the first quarter, it closed at $106.72 and since has continued
its climb. Many U.S. airlines ended 2010 with profits, pricing power and
optimism, but higher jet fuel costs single-handedly ruined first-quarter
financial performance. Profits for 2011, however, still are within reach thanks
to sustained fare-increase momentum, demand strength and downward capacity
With a $213 million first-quarter net loss, United
Continental Holdings could not overcome a $725 million year-over-year increase
in fuel expenses. A $610 million increase in fuel costs dragged Delta Air Lines
to a $318 million first-quarter net loss, worse than the $256 million loss
recorded a year earlier. US Airways posted a first-quarter net loss of $114
million, more than doubling its loss from the year-earlier period, as quarterly
jet fuel costs jumped by $240 million.
For American Airlines parent AMR Corp., which lost $436
million in the first three months this year, the $351 million year-over-year
increase in fuel costs was not the only thing standing in the way of profits,
as non-fuel-related events, including winter weather, distribution battles and
the earthquake in Japan, hit first-quarter revenue by more than $100 million,
Southwest Airlines and JetBlue Airways fared better.
Southwest overcame its growing fuel bill with a $5 million profit, down from
$11 million a year earlier. JetBlue, despite a 39 percent year-over-year
increase in jet fuel expenses, reversed last year's $1 million net loss to a $3
million net profit.
"Fuel is the biggest challenge facing this industry,
and Delta is actively reducing capacity, implementing fare actions, hedging our
fuel needs and attacking our cost structure in order to offset fuel's impact on
our earnings," according to a statement by CEO Richard Anderson.
In 2008, record-high fuel costs brought airlines to their
knees; comparisons with the current environment have been common. "2008
and 2011 fuel at midyear look about the same," according to a research
note issued last week by J.P. Morgan aviation analyst Jamie Baker. But now,
"capacity cuts, fare unbundling, consolidation, better management and a
fare-hungry Southwest can work wonders. To wit, we anticipate a $7.6 billion
industry operating profit in 2011."
Baker expects U.S. carriers to spend $10 billion more on jet
fuel than they did in 2010. According to the Air Transport Association, a $1
increase in the price of a gallon of jet fuel translates to an additional $17.5
billion in the industry's annual operating expenses. At press time, West Texas
Intermediate crude oil hovered around $110 a barrel on the New York Mercantile
Fare Hikes Drive
Domestic airlines so far this year have attempted 12 broad
fare hikes, seven of which have been successful, according to FareCompare.com.
Most of those added between $4 and $10 to the cost of a roundtrip ticket.
US Airways' total revenue per available seat mile in the
first quarter increased 9 percent on "strong demand" and "a
series of fare increases," with yield growth at 8 percent. Delta's
quarterly unit passenger revenue jumped 7 percent year over year, with a 12
percent improvement in passenger yield and 1 percent increase in total traffic.
United Continental Holdings' consolidated yield and RASM increased 13 percent
and 10 percent, respectively, on a pro forma year-over-year basis. AA's
consolidated passenger RASM grew 5 percent during the quarter, while yield grew
by 6 percent.
Southwest, meanwhile, reported that the average one-way fare
increased more than 11 percent to $139 and JetBlue for the quarter claimed the
highest average fare in its history, at $150, up nearly 6 percent from a year
Nevertheless, "the revenue growth experienced in the
first quarter has not been sufficient to keep pace with higher jet fuel costs,
which have risen more than 30 percent from a year ago," according to ATA
chief economist John Heimlich. "The airline industry remains concerned
about a possible slowdown in demand induced by rising energy prices across the
Major U.S. carriers agreed on the improving health of the
corporate travel market, even if volumes have not fully recovered to
pre-recession levels. "We continue to see rebounds in demand throughout
our corporate base, but notably in the automotive and financial sectors,"
said Delta president Ed Bastian, who claimed quarterly corporate revenue grew
27 percent year over year.
Claiming a 17 percent year-over-year increase in corporate
yields, United chief revenue officer Jim Compton said corporate revenue
improvement "has been slow but steady. Recovery has been largely driven by
yield improvements, with volumes increases not yet materializing."
AA vice president of corporate development and treasurer
Beverly Goulet reported that corporate revenue increased during the first
quarter and said "we continue to have a corporate revenue share premium
versus the industry."
To cut unprofitable flying and maintain pricing power,
several airlines during earnings calls last month revealed plans to further
scale back growth plans. Citing increasing fuel prices, US Airways CFO Derek
Kerr said, "Total system capacity in the back half of the year now will be
down versus 2010—in the third quarter by approximately 0.5 percent and in the
fourth quarter by around 2 percent." American also noted plans to cut an
additional 1 percent of fourth-quarter capacity.
Though its growth rates remain among the highest in the
domestic industry, JetBlue revised downward its full-year growth plan by 1
percentage point and now expects available seat miles to increase between 6
percent and 8 percent.
Delta after Labor Day will cut transatlantic capacity by 8
percent to 10 percent year over year to reverse what Anderson described as
"significant industry overcapacity in the transatlantic marketplace."
He said that "of the $200 million erosion in year-on-year pre-tax
earnings, $150 million of that amount is attributable to transatlantic
performance. We will fix that in cooperation with our transatlantic partners
Air France, KLM and Alitalia."
contributed to this report.