United Airlines parent UAL Corp., following three years of bankruptcy protection, in recent weeks cleared two hurdles toward February's Chapter 11 finishing line. United came to an agreement with its creditors on contested issues related to its plan of reorganization and last week reached a tentative deal with its flight attendants union for a replacement retirement plan, making cuts to the union's pension proposal. As of press time, the flight attendant agreements still were awaiting ratification.
"Being able to reach a global, consensual agreement with the creditor's committee prior to confirmation is the goal in any restructuring," CFO and executive vice president Jake Brace said. Once the flight attendant agreement is ratified, he said, "we will now have resolved pension and retirement issues with all of our employee groups."
The latest figures show the country's second-largest airline still very much in the red, but Brace said United returns rehabilitated and "ready to compete with the strongest carriers."
As United's exit from bankruptcy tips the scales of the Big Six toward solvency, with only Delta Air Lines and Northwest Airlines remaining under Chapter 11 protection, analysts and industry watchers are mustering the highest level of optimism in years—with some forecasting aggregate profits among legacy carriers for the first time since 2000.
"United has vastly improved its cost structure, and with our extensive route system with access to major markets in the U.S., Asia and Europe and strong regional connections with United Express, United is able to generate stronger revenue per seat than its low-cost competitors," said Kathryn Mikells, United vice president and treasurer. "We will exit bankruptcy next month, a much stronger airline, with credit ratings superior to those of our network peers."
Under president and CEO Glenn Tilton, United returns a leaner competitor than when it filed for bankruptcy at the end of 2002. Like many of the legacy carriers during the bitter downturn of recent years, United has slashed costs and cut flights to maximize aircraft use while improving on-time performance and upping load factors.
When reporting third-quarter earnings last year—its most recent financial posting—UAL reported a 5 percent jump in mainline passenger revenue, an 11 percent increase in unit revenue and a 9 percent improvement in passenger yield. A systemwide capacity reduction of 5 percent outpaced a traffic reduction of 3 percent, which pushed load factor to 84 percent—compared with 74 percent when it entered bankruptcy
(BTNonline, Oct. 31, 2005).Although fuel costs have plagued the carrier as much as its peers, during the third quarter its cost per available seat mile stood at nearly one cent less than in the same period of 2002. Per-seat revenue stood at a penny greater. Meanwhile, the company also has grounded roughly 20 percent of its aircraft.
Like American and Continental—which released earnings last week—United would have turned a modest profit during the first three quarters of 2005 had it not been for the ongoing pricing pressure on jet fuel or one-time charges from restructuring. Instead, United posted a net loss of more than $4 billion.
Meanwhile, Northwest finds itself further mired in bankruptcy. A federal bankruptcy court this month gave the airline six more months to file its reorganization plan. Last week, the carrier was in the midst of defending in bankruptcy court its business model proposal, which calls for labor cost savings and cuts in retiree benefits.
Although the high cost of jet fuel continues to prohibit healthy financial performance among the legacy airlines, some analysts are forecasting an aggregate profit among the mainline carriers.
Among them, Unisys Transportation analysts predicted, "The legacy carriers in the U.S. market will emerge from the financial woes that have plagued them since 2000 and will achieve 5 to 6 percent growth in passenger demand and revenue this year." The Unisys experts also said they expect the industry to yield a profit this year.
While Air Transport Association vice president and chief economist John Heimlich said the airlines would make a profit, he expects that to happen next year. "I expect the industry to turn a profit in 2007, but how much remains to be seen," he said.
The last profitable year was 2000, when the airline industry reported a $2.5 billion net profit, according to ATA figures. Between 2001 and 2004, the airlines lost more than $32 billion. "While we do not expect the U.S. Department of Transportation to release 2005 year-end financial results until mid-2006, we currently estimate a $10 billion net loss for the full year 2005," Heimlich said. "Add that figure to the performance during the past four years and we are looking at more than $42 billion in post-2000 losses, which truly is staggering."
"Having said that, industry fundamentals have improved and if fuel prices moderate, we could be talking about record profitability rather than multibillion dollar losses," Heimlich said. "Airlines are far from being out of the woods, but few can deny that they have turned the corner. Staying on course to recovery and sustaining financial health is the key, but airlines cannot do it alone. Ideally, airlines should be thriving, not just surviving."
Although the consensus is that 2006 will bring better fortune to the legacy carriers, David Strine, an airline analyst with Bear, Stearns & Co., in a report this month anticipated high fuel costs once again leading to losses for many airlines for the fourth quarter and full year, despite growth in yields and better control over costs not related to fuel.
Of the majors that have released their earnings, Continental Airlines and American Airlines last week concurred that high fuel prices and low-cost competitors continued to plague efforts to turn a profit for the fourth quarter or the full year of 2005.
Supporting claims that the industry is heading into a better 2006, Continental and American in many areas last year improved over 2004—even at an average 2005 jet fuel price of more than $72 per barrel.
Incurring a $68 million net loss, Continental mainline fuel costs were $856 million higher than in 2004, yet made gains in operational performance during the quarter with load factor increasing slightly, capacity increasing 9 percent and per-seat-mile revenue jumping 7.6 percent year over year.
American's parent company AMR for the full year posted a $93 million operating loss and $861 million net loss, "as compared to 2004's full-year operating loss of $144 million and net loss of $761 million." With fuel adding about $1.7 billion to its cost structure for the full year, AMR chairman and CEO Gerard Arpey during the company's earnings call last week said the company managed to turn an operating profit. "While we are dissatisfied with our financial results," Arpey said, "we did make progress in a number of important areas during the year, including our first annual operating profit, excluding special items, since the year 2000."
During the fourth quarter, American's revenue per available seat mile increased 13.8 percent year over year, while load factor jumped 3.6 points over the same period in 2004 to 77.9 percent. Yield, representing average fares, was up 8.5 percent.
Although Southwest Airlines headed out of 2005 in the black—with a full-year net income of $548 million—for the fourth quarter the carrier's load factors and yields hovered below its legacy competitors. It achieved a record fourth-quarter load factor of 69.6 percent, with yields up 4.2 percent and unit revenues up 11.7 percent.