Airlines Finally Post Profits In Q2
Domestic carriers through positive second-quarter earnings reports in the past two weeks detailed the reversal of fortune for an industry that has struggled for years. American, Continental and US Airways as well as AirTran, JetBlue, Midwest and Southwest all reported in-the-black earnings for the second quarter—typically the strongest for airline performance. Meanwhile, United, which is set to release final figures today, showed preliminary results of a profit for the quarter—its first since 2000.
"The second quarter is usually a solid one for the industry, and for the airlines that have thus far released results, this has been true," said Calyon Securities analyst Ray Neidl in a research note.
Airlines aggressively have cut non-fuel costs and improved passenger revenues through fare increases and higher load factors, and for the quarter the industry managed to counter the ever-high price of oil.
While profitability during the past few years largely has been reserved for low-cost carriers and regional players, the majors that released figures unanimously followed suit.
American Airlines reported a net profit of $291 million for the second quarter of 2006, an improvement over its $58 million for the same period last year. "We are pleased to have earned a quarterly profit—just our second in the last 22 quarters without the benefit of special items," said AMR chairman and CEO Gerard Arpey.
Continental's increased yields, record load factors, and improved passenger revenue—increasing 23 percent over the same period last year—all helped fuel a net income of $198 million and, according to preliminary results, United is looking at a net income of $119 million. The carrier's profitable quarter, like its competitors, comes on the heels of improved seat revenue, higher load factors and stronger yields—which represent growth in fares. "Although this profit indicates that the company appears to be turning the corner to returning to consistent profitability, it still has more work to do to catch up to and surpass its peers," Neidl said.
US Airways cited last year's merger with America West as a major turnaround for the company, and the carrier followed its first quarter profit with a record quarterly profit of $305 million. "We are extremely pleased to report a second-quarter profit of this magnitude," said US Airways chairman, president and CEO Doug Parker. "This quarterly profit excluding special items is a record for US Airways and is amongst the highest of its predecessor companies. While other airlines are reporting second-quarter profits, no other airline has experienced an improvement as dramatic as US Airways, as evidenced by our second-quarter profit margin, which is the highest among the major hub-and-spoke airlines and a remarkable reversal from recent years."
Low-cost carriers also fared well for the quarter. Southwest Airlines reported a second quarter net income of $333 million—more than doubling its profit form the same period last year. The carrier boasts the highest net earnings of those carriers that have released results for the second quarter and logged record quarterly revenues. "Thus far, strong load factor trends have continued in July, and customer bookings for the remainder of third quarter 2006 are strong. Based on our July results to date, we expect strong year-over-year unit revenue trends again in third quarter 2006," CEO Gary Kelly said. "The company continues to outperform the industry with the best fuel hedges among the carriers," Neidl noted.
AirTran boasted an all-time-high quarterly net income with a profit of $32 million. AirTran also said record-high revenue passenger miles, capacity, enplaned passengers and load factors helped secure a strong quarter.
Although disappointing to Wall Street, JetBlue returned a net income for the quarter of $14 million. The low-cost carrier helped push through a series of fare increases this year, which returned the airline a yield that was up about 22 percent over the same period last year. Though the carrier has grown available seat miles 23 percent since the same quarter last year, load factor fell nearly 6 points to 82.2 percent.
Midwest Airlines scored a net income of $8.8 million, compared with an $8.2 million loss for the same period last year. "A strong increase in passengers and improved fare environment contributed to strong revenue performance, while improved non-fuel costs resulted in an operating profit for the quarter," a Midwest spokesperson said.
As of press time, Frontier airlines had yet to release earnings for its most recent quarter.
Even prior to the airlines' release of final results, Neidl noted he was optimistic about carrier performance and even posited the possibility of the industry's first profitable year since 2000. "For the second quarter of 2006, we expect the U.S. airline industry will return to profitability, with industry net income projected at approximately $1.2 billion," Neidl said in a research note. "This positive trend should continue through the third quarter and even possibly into the slow fourth quarter. We are projecting the industry to earn about $747 million for the year." As fuel costs remain the X-factor for airlines with oil prices hovering above $70 a barrel, strong demand for air travel and tightened capacity will help offset the industry's most nagging expense. The good news for airlines, however, translates into more costs for buyers, Neidl said, as "there is room for additional price increases."