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Recovering air traffic and capacity discipline and the resulting improvements in the pricing environment are starting to pay off for U.S. airlines. Of the eight major carriers to have reported second-quarter earnings by press time, seven posted net profits. The lone loss maker, American Airlines parent AMR Corp. fell short with an $11 million net loss, much narrower than the $390 million loss a year earlier. Southwest Airlines is scheduled to report its second-quarter performance on Thursday.
Absolute numbers and characterizations by executives around the industry leave little room for doubting the financial recovery. Delta Air Lines' second-quarter net profit of $467 million--reversing the net loss of $257 million from a year earlier--represented "our best result in a decade," according to CEO Richard Anderson. UAL Corp. reported its "first quarterly profit since 2007" with net income of $273 million. Excluding one-time items, $430 million marked the company's "largest second-quarter profit since 1999," said CEO Glenn Tilton. US Airways achieved its second-highest quarterly profit since the 2005 merger with America West Airlines of $279 million. JetBlue reported its "highest-ever quarterly operating income" at $94 million, "record revenues" and an overall financial result that was the "best performance in the last eleven quarters," according to CEO Dave Barger. Alaska Air Group's net income of $84 million (excluding special items) marked "the best quarterly profit in our history," the company said. AirTran Holdings in the second quarter posted an "all-time" revenue record of $634 million and "quarterly records" for total traffic, load factor and enplaned passengers, according to the company.
Though AMR failed to emerge from red ink, the company achieved its first operating profit since 2007.
All carriers reported total passenger revenue increases in the mid-teen percentages or higher. At United, the year-over-year growth hit 28 percent. All carriers also achieved sizable year-over-year increases in unit revenue and passenger yield. Continental's average second-quarter passenger fare jumped 21 percent, to $236. AirTran (+12 percent) and JetBlue (+10 percent) also detailed higher average fares.
Executives generally sounded confident that second-quarter performance wouldn't be an anomaly. "The demand trends we are currently seeing give us reason to be optimistic about the outlook," according to Continental CEO Jeff Smisek. Said US Airways CEO Doug Parker, "We are encouraged by the economic recovery we have seen thus far. Looking forward, and based on current business and economic conditions, we expect to report a profit for the third quarter and full-year 2010."
According to analysts at AirlineFinancials.com, the airline industry--excluding AA and assuming fuel prices at or below $85 per barrel--"should see significant profits for the current third quarter."
The return of high-yield premium customers, particularly corporate and international customers, has aided the airline industry's recovery. According to American's Tom Horton--recently promoted to president from CFO--the second quarter produced "significant increases in corporate revenues that far outpaced our first-quarter year-over-year improvements." Delta's second-quarter corporate revenue jumped 60 percent year over year. United also cited strong corporate travel trends, including transatlantic and transpacific premium cabin booking growth of 38 percent and 46 percent, respectively, during the June quarter versus a year earlier.
Comparisons with 2008 generally have remained unfavorable--but are improving. At Continental, "We have seen a continued sequential improvement in high-yield passengers since the beginning of the year, but their numbers were still down about 20 percent in June 2010 compared to June 2008, and revenue from high-yield passengers was down about 10 percent in June 2010 compared to 2008," according to chief marketing officer Jim Compton.
At US Airways, corporate revenue during the second quarter increased 42 percent year over year but still was down 2 percent versus 2008. In the month of June "for the first time this year, corporate revenue was up versus 2008," said president Scott Kirby.
Though airline executives said further volume recovery is necessary to realize sustained profits, strengthening demand coupled with capacity discipline has produced upward pricing pressure. Passenger yield in the domestic U.S. market (the average price paid to fly one mile) increased year over year in each of the past six months, according to the Air Transport Association. The June jump of nearly 18 percent--to 15.27 cents per mile--was the largest percentage increase for any month in at least nine years.
On overseas routes, United improved unit revenue to Asia by 52 percent, including 64 percent to China and 46 percent to Japan--partly due to "improvements in yields and load factors in premium cabins," said president John Tague.
"Both transatlantic and transpacific [premium class] yields were positive in May and June on a year-over-two year basis," Continental's Compton said.
In emphasizing capacity discipline, airline executives discussed plans that call for fewer seats or modest additions for the remainder of the year.
American expects its full-year 2010 consolidated capacity to increase by about 1 percent versus 2009, with domestic capacity down marginally. Similarly, Continental expects full-year 2010 consolidated capacity to be up by no more than 1.5 percent, with domestic mainline capacity down marginally. Said Smisek, "Our 2010 mainline domestic capacity will be down about 12 percent versus 2007.
Delta forecast a 5 percent to 7 percent increase in fourth-quarter system capacity, which according to president Ed Bastian would "still be noticeably lower than the fourth quarter of 2009."
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