Air Industry Earnings Indicate More Pricing Power

Domestic airlines generally weathered the traditional fall travel slump with strong load factors and rising year-over-year fares. American, Continental, United and Southwest posted profits for the quarter, while Northwest, US Airways and JetBlue stumbled with losses.

Calyon Securities analyst Ray Neidl said fare levels have not scaled back much during the shoulder season, as domestic carriers continue to test their pricing power. In a report released prior to the airlines' earnings announcements, Neidl anticipated a domestic industry-wide profit of $1.5 billion for the third quarter, and a $1.3 billion profit for the year—the first since 2000. "The industry environment seems to be positive, driven by improving fundamentals, and we remain encouraged through 2007," he said last week.

Carriers again cited high fuel bills as a barrier to healthier performance, and this quarter reflected the London terror threat and its effects on security measures. "Recent drops in oil prices have helped absorb some of the negative effects of August's somewhat reduced traffic numbers," said Neidl. "At this point, what we would be most concerned about is a general slowdown in the economy."

United parent company UAL Corp. last week announced a profit of $190 million as the carrier's "continuing revenue and productivity improvements more than offset a $293 million increase in consolidated fuel expense." Its flights were nearly 84 percent full and fares were 10 percent higher than the same period last year.

AMR Corp., American Airlines' parent company, reported a profit of $15 million for the third quarter, rather than the $153 million net loss for the period last year. AMR chairman and CEO Gerard Arpey said it was "the first time in nearly six years that we have recorded a profit in two consecutive quarters."

American hit a record load factor for the third quarter, flying at nearly 82 percent capacity. The carrier also benefited from higher fares, represented by yields, which increased 7 percent over the same period last year.

Continental Airlines posted the best performance with net income of $237 million. Passenger revenue increased 17 percent over the same period in 2005, with revenue per available seat mile increasing 7.4 percent due to higher fares—yield increased 6 percent year over year—and record load factors, which averaged a new high of 82.2 percent. The carrier grew mainline capacity during the quarter 8.6 percent over last year's third quarter. Although the carrier's fuel costs for the quarter increased $174 million over last year, Continental said by year-end it will improve fuel efficiency by nearly 25 percent per available seat mile as compared with 1998.

Southwest Airlines reported a net income of $48 million, a slip from its $210 million profit for 2005's third quarter. "Although the revenue momentum has slowed, demand for low fares has continued and, overall, our revenue growth is healthy," said CEO Gary Kelly, adding that thus far into the year's last quarter "load factors and bookings remain solid, and year-over-year unit revenue growth is currently 4 percent to 5 percent." Operating revenues increased nearly 18 percent. Southwest posted a load factor of 74.7, with yield increasing 8.8 percent.

Unprofitable carriers largely attributed their finishes to special items. One year into its merger with America West, US Airways reported a loss of $78 million, an improvement over its net loss of $99 million for the same period last year. Excluding special items, the company reported a third-quarter 2006 net profit of $101 million.

US Airways Group chairman and CEO Doug Parker said, "We are pleased to report our third consecutive profitable quarter, excluding special items, especially given the new security regulations put into place in August, which we estimate negatively impacted revenue by $30 million to $40 million during August and September." The company said it expects to report a profit for the "seasonally difficult fourth quarter."

Northwest attributed its loss of $1.2 billion to special items as it reorganizes under bankruptcy protection. Excluding that, it reported a third-quarter net profit of $252 million. President and CEO Doug Steenland said, "Our third-quarter results are a significant improvement over last year's results and demonstrate further that we are making steady progress in restructuring Northwest Airlines."

JetBlue posted a net half-million-dollar loss for the quarter, compared with a net income of $2.7 million for the same period last year. The carrier has embarked on an aggressive growth strategy, increasing its available seat miles 19 percent from the same period last year. Given JetBlue's unprofitable performance, CEO David Neeleman said the company would "reduce our rate of growth over the next three years" through fleet reductions.

As mainline carriers grew load factors to new highs, JetBlue posted a decrease of 6.2 percentage points from last year to 80.4 percent for the third quarter of 2006. The carrier's fares, however, surged 23.5 percent compared with the same period last year.