Airline Earnings Reports Show Profitability
American, Continental and Southwest—the major domestic carriers that released earnings this week—are three for three in scoring a profit last year, living up to the expectations of analysts and economists who predicted 2006 would bring a turnaround for the long-suffering airline industry. While other major domestic carriers have yet to release full-year or fourth-quarter earnings, it appears that the domestic industry's balance sheet has turned from red to black, according to projections. Economists and analysts expect 2007 to improve upon the trend.
Citing declining fuel costs, cost-cutting initiatives and growing fares and load factors, American Airlines managed to turn a profit for the fourth quarter and the year—its first annual profit since 2000.
American last year recorded record load factors, averaging 80.1 percent. Average fares rose by 4 percent— "marking American's seventh consecutive quarter of yield increases in which the airline has seen year-over-year yield improvement," the carrier said in an earnings statement.
Calyon Securities analyst Ray Neidl expects fares to continue their growth trend this year. "We believe that with demand remaining strong, we will see additional price increases as we move toward the strong spring travel seasonal," Neidl wrote in a research note.
Although Continental posted a loss for the fourth quarter, profit for the full year totaled $343 million, compared with 2005's net loss of $68 million. With increased fares and record load factors, annual passenger revenue increased 17.3 percent. "In 2006, we grew revenue at almost twice the rate we grew capacity, and we grew mainline capacity more than any of the other major network carriers," said Continental president Jeff Smisek.
No stranger to profitability, Southwest Airlines reported it was profitable in the fourth quarter and posted a full-year profit of $499 million, The carrier's improved revenue picture included an annual load factor increase to 73.1 percent, as well as average passenger fares last year growing by 11.4 percent.
Although two of the three carriers that have released earnings noted a fourth-quarter profit, Neidl in a research note prior to earnings said, "We expect 4Q06 results to be disappointing for the industry relative to what we had been previously forecasting. Currently, we expect the industry to lose $31 million for the fourth quarter but produce a $2.1 billion profit for FY2006."
Like Neidl's projections, the Air Transport Association said the industry should report profits in the $2 billion to $3 billion for 2006. ATA, meanwhile, said the economic outlook for the airline industry in 2007 is even more promising, with a projected net profit of approximately $4 billion, according to its annual economic outlook released this month.
"The outlook for 2007 is the most promising in years, thanks to a healthy revenue environment and the realization of extensive cost-reduction efforts," said ATA chief economist John Heimlich in a statement. "The real challenge, however, will be to achieve meaningful and sustainable profits and to improve credit ratings to the point where airlines can weather normal economic turbulence while simultaneously investing in their future."