Airlines Post Strong Numbers At United's Expense

<B>Airlines Post Strong Numbers At United's Expense</B>

By David Jonas

Several airlines, notably American and Continental, posted very healthy third-quarter financial results boosted by spillover from widespread difficulties at United Airlines. Despite persistent cost pressures related to fuel, other airlines managed a solid quarter, including Northwest and Southwest. US Airways and Trans World Airlines again reported net losses.

Looking forward, higher fuel and labor costs combined with an expected slowdown in demand has prompted Wall Street analysts to lower earnings estimates at several carriers for 4Q00 and into 2001.

United, as expected, posted a net loss for the quarter due to prolonged operational problems stemming from labor unrest. The loss was more than expected, as the carrier's parent, UAL Corp., suffered a net loss of $65 million, or $1.29 per share. Revenue passenger miles declined nearly 3 percent, while capacity was down 2 percent. The carrier said reduced capacity levels, fuel prices and mounting labor costs likely will result in a loss in 4Q as well.

United's problems were a windfall for several other carriers, especially American Airlines, which said difficulties at its number-one rival generated as much as an additional $100 million. That helped AA lead the field in net income, at $322 million--51.2 percent ahead of last year's third quarter. Earnings per share for parent company AMR Corp. were $1.96, above the $1.78 that was the consensus of Wall Street analysts surveyed by First Call. Passenger yield shot up nearly 8 percent, to 13.88 cents, as overall revenues jumped nearly 12 percent, to $5.3 billion, and RASM grew nearly 15 percent. Systemwide RPMs grew more than 4 percent, while capacity was cut 2 percent, as the expanded coach class leg room project continued. As a result, load factor was up 4.5 points, to 76.3 percent. International traffic rose 5 percent, aided in part by international partnerships. AMR chief Don Carty said fuel hedging saved the airline $150 million. Fuel requirements are 70 percent hedged for 4Q and 35 percent in 2001. Looking ahead, a First Call consensus estimates 4Q earnings at 78 cents a share, up from 57 cents last year.

Continental Airlines also attributed its additional $20 million in revenue to UAL's difficulties. Overall, the carrier posted some of the healthiest numbers, including record passenger revenue, passenger yield and load factor. Revenue per passenger miles particularly were strong in the Pacifc, increasing nearly 20 percent, while both domestic and transatlantic figures showed double-digit growth. The carrier said more than 46 percent of all tickets sold were at business fares, up 3 percent from a year earlier. Beating Wall Street estimates, earnings per share were up 56 percent, to $2.24, as profits climbed 32 percent, to $137 million. Costs, however, even when excluding fuel, were up from last year and planned capacity growth has been trimmed for the remainder of this year and 2001. The consensus of analysts for next quarter, as measured by First Call, is down at $0.90, and $5.76 for FY00.

Southwest also showed its strength, posting a quarterly net income of $184.3 million, up 45 percent from a year earlier. Earnings per share of $0.35 beat Wall Street estimates. RPMs were up 14.1 percent on 12.4 percent capacity growth, resulting in a 76.1 load factor, a record for the third quarter. Excluding fuel, operating expenses were down 1.2 percent and operating margin was an impressive 20.3 percent. Southwest said 80 percent of expected fuel needs for 2001 is hedged under $23 a barrel. The carrier expects improved year-over-year performance for 4Q. Indeed, First Call predicts earnings at 26 cents a share, up from 18 cents in 1999.

Northwest, too, checked in with healthy 3Q numbers, including $191 million in net income, excluding non-recurring items. Earnings per share of $2.06 easily beat analyst estimates. Systemwide, passenger revenues rose 11.9 percent, while RASM jumped 8.6 percent. Pacific operations particularly were strong, with a RASM increase of 15.6 percent. Overall, traffic growth exceeded capacity growth, resulting in a quarterly load factor of 79.7, tops in the industry and a Northwest 3Q record. Northwest estimated a $15 million benefit from UAL's problems.

Delta's earnings per share grew 9 percent, to $2.08, excluding one-time items, slightly above First Call's consensus. However, net income slid 3 percent, to $273 million. Passenger revenues essentially were flat and passenger yield inched up 2 percent. RASM numbers were solid throughout the network, especially in the Pacific, where the figure grew more than 21 percent. Capacity, traffic and load factor all increased year over year. Non-fuel-related unit costs rose 2.6 percent, though the carrier's aggressive hedging strategy saved it $160 million. Overall, the carrier posted a strong 12.1 percent operating margin. For 4Q, First Call consensus estimates EPS of $1.12, and $1.54 for 1Q01. Delta said its fuel requirements are 60 percent hedged for 4Q and 40 percent for 2001.

Alaska Airlines, while notching higher yields, brought in only about one-third of 3Q profits last year. Operationally, capacity declined by 3 percent to improve reliability, though growth was planned for 6 percent. Traffic fell a bit less, resulting in higher load factors. However, higher fuel and maintenance costs hurt the carrier, as overall costs per available seat mile rose more than 16 percent. In a research note to investors, PaineWebber analyst Sam Buttrick said Alaska's earnings gained 10 cents per share as a result of United's problems because "a disproportionate number of United's cancellations were in their high-density West Coast Shuttle operation." However, looking ahead, First Call estimated a 13 cent loss per share for 4Q, down from 60 cents this quarter. FY00 is estimated at $1.12, down from last year's $4.78 figure.

America West Holdings, parent company of America West Airlines, barely made a quarterly profit, posting a net income of $1.3 million, down more than 90 percent from last year and well below analysts expectations. While revenues were up 8 percent, to a record $578.5 million, costs grew 11.2 percent and passenger yield essentially was flat. However, traffic growth outpaced capacity growth, resulting in a load factor increase of 1.7 points. America West blamed high fuel prices, an increase in income tax rates and poor operating performance for the weak results. Looking ahead, Buttrick has lowered his 4Q estimate to a 10-cent loss per share and slashed FY01 earnings estimate by 20 cents a share.

US Airways and TWA finished the quarter in the red. US Airways posted a 3Q loss of $30 million, far more than Wall Street had expected. The loss still was a vast improvement over last year's $85 million net loss, though another loss for 4Q is expected. Revenue passenger miles grew nearly 20 percent as capacity increased 17 percent. Passenger yield, however, eroded more than 5 percent. Aside from fuel--which the carrier has not hedged moving forward--US Airways also cited increased competition from low-fare carriers, including AirTran, JetBlue and Southwest (see story, page 1). Financial performance moving forward will hinge on approval of the merger with United. First Call estimates a 4Q loss of 13 cents a share and a 90-cent loss for the year.

TWA lost money yet again, recording a net loss of $34.8 million. However, the loss was less than last year, and other figures--including RASM, passenger yield and load factor--all showed improvement. Overall passenger revenues increased by nearly $90 million. Even costs, excluding fuel, were down nearly 3 percent.