The U.S. airline industry during the quarter ended Sept. 30 reversed deep losses from a year earlier to achieve a banner performance. Airline executives pointed to mergers, conservative capacity planning, business travel recovery, particularly strong revenue and airfare trends, and a general approach focused more on shareholder value than market share.
"We believe this quarter's results are a watershed event, not just for US Airways but for the U.S. airline industry," said US Airways CEO Doug Parker. "The airline industry is recording record or near-record profits, while the rest of U.S. industry is not. That hasn't happened before. It's concrete evidence that fundamental restructuring really has taken place. Consolidation has happened; new pricing models have been put in place that make more sense for generating higher returns."
Southwest Airlines CEO Gary Kelly said, "What a difference a year makes" and cited a long list of revenue-related records. Southwest posted a net profit of $205 million.
At US Airways, a $240 million third-quarter profit--reversing an $80 million loss from a year earlier--marked "the highest third-quarter net profit in the company's history," according to a statement. AMR Corp. for the third quarter reported a $143 million net profit, its "first profitable quarter, excluding special items, since the third quarter of 2007," said CEO Gerard Arpey. Continental Airlines, Delta Air Lines and United Airlines each swung from third-quarter losses last year to profits in excess of $350 million this year.
Overall, independent airline consultant Robert Herbst, founder of AirlineFinancials.com, predicted that the nine largest U.S. carriers would report a combined $2.4 billion in profits for the third quarter, which would be "an all-time record profit" for any third quarter and the first since 2007 in which all nine would end in the black.
Fares and surging business demand contributed to the healthy results. On the former, United posted an average fare increase for the third quarter of 25 percent versus last year. Continental's increase was 24 percent, Southwest's 16 percent and JetBlue's 12 percent.
In terms of business travel demand, Delta reported a 35 percent jump in corporate revenue, "driven largely by a 27 percent increase in corporate volumes," according to president Ed Bastian.
For US Airways, quarterly corporate revenue increased 23 percent and was up "1 percent compared to 2008," said president Scott Kirby. "That's not much, but it's nice to be in positive territory for business demand versus 2008." Kirby added that "business-oriented markets significantly outperformed leisure markets," noting that unit revenues for the Northeast shuttle routes, for example, jumped 21 percent.
Other airline executives offered a cautious outlook. "We believe this is going to be a long, slow recovery," said United chief revenue officer Jim Compton. "Early indications from our corporate accounts indicate that they agree with this characterization. We are seeing some recovery in fares, but the number of corporate travelers is still lower than we'd like it to be."
Southwest's Kelly told analysts that "you haven't seen the full return of the business traveler. We are not seeing the levels of business traffic that we had in '07 or '08. No one is representing that their business travel has returned to that level."
Defining Discipline
Meanwhile, airline executives during conference calls with analysts again discussed capacity discipline, explaining how modest growth plans for the remainder of 2010 and into 2011 are appropriate given strengthening demand trends.
When J.P. Morgan analyst Jamie Baker asked airline chief execs to define "discipline," Delta CEO Richard Anderson said, "It is pretty much an overused term. It means that whatever growth you have in the business has got to be below GDP [growth] and can't be at the expense of yield and [unit revenue] improvement. You keep up with demand--don't worry about chasing share--and what is going to increase the operating margin of the company."
Said US Airways' Parker, it's about focusing "on what you are supposed to do and not succumbing to temptation. Temptation in our business comes in all sorts of different shapes and sizes. Sometimes it's wanting to be the biggest or caring more about market share than profitability. We are competitive people, and we don't like to see people getting more share; that's temptation.
"Crises force discipline on us," Parker continued. "Unfortunately, when a crisis subsides, we tend to, at least sometimes, succumb to temptation. That is what everyone is worried about right now. I think it's dramatically different this time."
While American, too, "will continue to exercise capacity discipline in 2011," according to Arpey, UBS analyst Kevin Crissey wasn't so sure. "We were surprised by [AA's] capacity guidance for 2011 of up 4 percent," he wrote in a research note this week. Industry capacity is heading north of GDP forecasts--typical for the industry, but that's the problem."
Nevertheless, in noting a rally in airline stock prices following earnings reports, Crissey wrote that airline executives' "positive commentary on the 'new look' of the industry won over those that had been on the sidelines."