Airlines Ride 2Q Roller Coaster

Four major U.S. airlines this week reported second-quarter financial figures that pointed to improving trends, including higher year-over-year unit revenues, as executives conveyed cautious optimism. Boosted by a cash infusion from the Transportation Security Administration, American, Continental, Delta and Northwest airlines each reported stronger year-over-year earnings that beat analysts' expectations. In the case of American, Delta and Northwest, earnings were aided by the recent sale of Worldspan.

Nevertheless, industry traffic early in the quarter was ravaged by the war in Iraq and severe acute respiratory syndrome. Excluding government aid and other special items, each of the four airlines would have posted deep quarterly losses, and executives at each company warned of ongoing weakness in the revenue environment.

Even after factoring in government relief, AA yesterday still recorded a $75 million net loss. Excluding one-time items, the loss was $357 million. On the positive side, AA achieved a modest profit in June, which CEO Gerard Arpey said, "feels like an enormous step forward." While encouraged, Arpey added, "We must keep in mind that we're operating in peak summer season right now, and the winter months will be more challenging."

Meanwhile, American's share of corporate traffic increased on a year-over-year basis, according to Jeff Campbell, CFO and senior vice president of finance. "We're encouraged by business travel trends, which are based on overall business traffic and global traffic of our corporate clients," he said.

Continental, Delta and Northwest--buoyed by TSA reimbursements--today each posted positive net income. For Continental and Northwest, it was the first quarter in the black since the third quarter of 2001. For Delta, net profits were a first since the fourth quarter of 2000.

"The quarter has been somewhat of a roller coaster," said Continental CEO Gordon Bethune, who reported a $79 million net profit, "but we feel pretty damn good about where we are." Continental, which reported improvements in advance bookings, ended the quarter with a record cash level of $1.6 billion.

Delta's quarterly net income was $184 million but, excluding special items, came in at $237 million loss. Chairman and CEO Leo Mullin said advance bookings in all areas are showing improvement but called such trends "baby steps." Delta continues to be in a strong liquidity position relative to competitors, with $3 billion in total cash at the end of the quarter.

All special items considered, Northwest thus far posted the quarter's largest net profit of $227 million. Excluding special items, however, the net loss totaled $160 million and represented the carrier's worst second-quarter financial performance in company history. "We are still not seeing meaningful improvement in the underlying financial performance of the airline," said CEO Richard Anderson. "The revenue environment, at best, is showing marginal improvement."

Meanwhile, Sabre Holdings said demand levels by the end of the quarter ending in June had returned to their pre-war position, but company officials said corporate travel has been slower to rebound than leisure.