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Despite the facts that legacy carriers last month
collectively reported their largest quarterly profits in years, that each month
in 2010 saw revenue improve over the same month in 2009 and that pricing and
demand are unquestionably improving from the depth of the recession, US Airways
president Scott Kirby said the airlines are experiencing a "tepid
recovery," and other executives reporting second-quarter earnings said the
climb out of recession continues to be a slow one.
The legacy airlines, however, can do worse than tepid and
slow, and during the quarter hit a peculiar sweet spot: an economy that is
lifting demand for air travel but not yet improving at a rate to similarly lift
the cost of oil, executives told investors, analysts and reporters tuning into
second-quarter earnings calls last month. Add to that sustained capacity
discipline and years of airline cost-cutting, and the five legacy carriers were
propelled to nearly $1.25 billion in second-quarter profits.
"From a macroeconomic perspective, this feels to us
like a tepid recovery and one that isn't getting rapidly better but certainly
isn't double-dipping or getting any worse," Kirby said. "While that's
not what we would like to see for the country at large, a tepid recovery is
also leading to moderate fuel prices. As a result, US Airways and the industry
are producing near-record profits, despite the fact that we have a weak
Carriers presented a year-over-year picture that looked
astounding, with revenues growing in excess of 20 percent. Distorting that
picture, however, were 2009 comparisons that captured some of the worst demand
and revenue months of the decade.
Though year-over-year revenue growth in June, the last month
of the second quarter, was 25 percent—the sixth consecutive month of growth
from like months in 2009, according to the Air Transport Association—airlines
are only beginning to approach like-month revenue performances registered in
Comparing current revenues to the second quarters of 2008
and 2007 reveals a different picture. For example, Continental Airlines said
total passenger revenue was down 9 percent compared with the second quarter two
"We like the trends we are seeing, but continue to
believe this will be a long, slow recovery," executive vice president and
chief marketing officer Jim Compton said during the carrier's earnings call,
pointing to growing, but still lagging, premium traffic—a big moneymaker for
the airlines. "We're seeing continued, sequential improvement in
high-yield passengers since the beginning of the year, but their numbers were
still down 20 percent in June 2010 compared to June 2008, and revenue from
high-yield passengers is down about 10 percent in June 2010, compared with
Compton said Continental's corporate clients confirmed that "business
is coming back slowly," adding, "I would say they talk about less
restrictions in terms of travel policy, and we haven't heard anything about
more restrictions in travel policies."
Delta Air Lines CEO Richard Anderson said, "The revenue
environment is improving. I would characterize it as good, but not yet great."
United Airlines said it was the only carrier to post
second-quarter unit revenue growth from the same quarter in 2008. "We feel
pretty good right now about our trajectory for the second half of the year,"
United executive vice president and CFO Kathryn Mikells said.
"All of our revenue metrics are up dramatically year
over year, but still down slightly from their peak in 2008," US Airways'
Kirby said, reminding investors that the second and third quarters of 2008,
with which he was making comparisons, "represent the all-time high for
airline revenues, as the economy was strong, and airlines responded to high
fuel prices with aggressive price increases."
Still, profits are profits, and airlines have blended
constrained capacity, fuel prices that remain in line with expectations and
moderately improving economy as a recipe for profitability.
Including American Airlines' $10.7 million net loss, the
legacy airlines collectively pulled in nearly $1.25 billion in profits for the
quarter—the most profitable one in years.
AirlineFinancials.com expects the nine largest U.S. carriers
to "have strong revenue performance for the remainder of 2010," but
excluded American from the fortunes of its peers when it comes to profits.
"Assuming fuel prices remain in the $75-to-$85
per-barrel price range, the airline industry should see significant profits for
the current third quarter," industry consultant and AirlineFinancials.com
founder Robert Herbst said.
This story originally
appeared in the August 9, 2010, edition of Business Travel News.