The now familiar detriments of high fuel costs, excess capacity and weakened revenue combined to bury the frazzled airline industry in deep fourth-quarter and full-year 2004 losses.
Due in part to airfare reform
(see story) most major carriers recently predicted continued losses for the current quarter, even before a blizzard last month crippled airline operations across many major Midwestern and Northeastern markets.
"Since 2002, industry recovery has been just over a steadily receding horizon," according to UBS analyst Robert Ashcroft, who estimated 2005 industry losses near $3 billion. "This year will again be poor and 2006 will be the elusive transition year."
Recent data from the Air Transport Association corroborated airline executive comments regarding weak revenues by showing continued passenger yield erosion. Industry revenue per passenger mile in December fell 9 percent, representing the eleventh monthly decline in 2004. For the full year, yield dropped more than 4 percent to $0.115. The last annual increase came in 2000, when average industry yield was $0.145, according to ATA.
As has become tradition, Southwest Airlines was the only major U.S. carrier to post a profit for both the quarter and the year, though each figure was lower than what was attained in 2003. The carrier's relative success is a direct product of lower costs which were helped tremendously by an aggressive fuel-hedging program. Southwest, which said 2005 fuel needs are 85 percent hedged at favorable prices, expects to post a profit for the current quarter.
Most others remain more heavily exposed to high fuel prices and do not expect near-term profitability.
Delta Air Lines' net losses were the deepest, not only among carriers reporting fourth-quarter numbers but in a historic context: $2.2 billion for the quarter is thought to be the largest single-quarter deficit recorded in the industry, albeit with $1.4 billion in net one-time items, and $5.2 billion for the year marks an inauspicious company record. "These numbers show clearly the difficulties our airline will continue to face in 2005," said CEO Gerald Grinstein.
Delta CFO Michael Palumbo said 2005 "is a transition year for us" as the carrier's new fare structure takes hold and produces an overall negative revenue impact for the year. On the cost side, the carrier said it has secured half of the $5 billion annual savings targeted off a 2002 baseline.
Bankrupt carriers United Airlines and US Airways dropped $1.6 billion and $611 million, respectively, in 2004
(see story), while Delta marketing partner Northwest Airlines posted a large loss that, inclusive of one-time items, swelled to $878 million. By contrast, the carrier posted a $236 million net gain in 2003.
Along with competitive pricing and stinging fuel costs, "labor cost savings realized by some of our major competitors make it imperative that Northwest achieve labor restructuring quickly in order to return to profitability," said president and CEO Doug Steenland. Northwest already reached a deal with pilots
(BTNonline, Oct. 15, 2004) that some analysts suggested may not generate enough savings. The carrier is working on new deals with other unions.
Slightly narrower than Northwest's deficits, American Airlines parent AMR Corp. posted net losses of $387 million for the quarter and $761 million for the year. As expected, the culprit was fuel, which cost American more than $1 billion more in 2004 than a year earlier. Since recording its last annual profit in 2000, AMR has dropped more than $7 billion and achieved net profits in only two of 16 quarters.
"Barring any major change, our outlook for 2005 doesn't look a whole lot brighter," AMR CEO Gerard Arpey said, anticipating AA would post another loss for the current quarter. "We are mystified by the competitive responses we are seeing in this environment. We are trying to draw down capacity and raise prices. The response we are seeing is just the opposite."
Arpey said American would emulate hotel company strategies by "unbundling elements of our products and services" as it already has done with reservation fees and onboard meal-purchase programs.
Despite meeting analyst expectation in the fourth quarter, Continental Airlines' full-year result swung from a $38 million profit in 2003 to a $363 million loss in 2004. Like its peers, Continental suffered from fuel prices: unit costs excluding fuel were down 4 percent on the year, but inclusive of fuel costs were up 3 percent.
New CEO Larry Kellner said his first year on the job would be "another tough one" for the carrier in 2005.
America West parent America West Holdings posted losses for both the quarter and the year after achieving positive net figures a year ago. Chairman and CEO Doug Parker said the company would lose money in the current quarter but said the airline is "well-prepared" with a strategic cost advantage. Similarly, Alaska Airlines recorded a net loss for both the quarter and the year after notching a slim profit in 2003, while Frontier Airlines' fiscal third-quarter results swung from a small profit a year earlier to an $11 million loss.
Both AirTran Airways and JetBlue Airways in 2004 collected more than $1 billion in passenger revenue, qualifying for major carrier status. Both were profitable in the fourth quarter and for the full year, although net earnings declined from those achieved in 2003.