The U.S. airline industry suffered through another brutal first quarter, plagued by mounting fuel costs, debt obligations and the severely depressed revenue environment. Meanwhile, major carriers are restoring capacity at a brisk pace to defend markets from one another and from rapidly expanding low-cost competition. The result was more red ink for the legacy carriers and small profits for discount airlines.
There are positive developments for the largest players, including ongoing cost cuts and new pension legislation signed this month by President Bush. Major airlines were among those companies receiving relief from previously required deficit reduction contributions
(See Washington Wire).UBS analyst Sam Buttrick recently suggested United would succeed in gaining approval from the Air Transportation Stabilization Board for a federal loan guarantee, seen as "critical" in the airline's bankruptcy reorganization, but said the situation at US Airways "may weigh on the United deliberations." Both United and US Airways have not yet announced first-quarter earnings.
Of those that already reporting, Delta spilled the most red ink. It lost $383 million in the first quarter, beginning a fourth consecutive year of losses, excluding a government cash injection in last year's second quarter. The carrier's top priority is to cut pilot costs, but there has been no progress to report.
Meanwhile, CEO Gerry Grinstein is in the midst of a full strategic review and plans to submit recommendations to the Delta board by late summer.
Complicating matters, Delta this month will lose CFO Michele Burns, who announced her retirement from the company. Delta already is operating without a president or COO, posts left vacant upon the recent departure of Fred Reid
(BTN, March 29).After turning a $236 million net profit in 2003, including all one-time items, Northwest Airlines lost those gains in the first quarter by dropping $230 million. Though the carrier posted strong revenue numbers, fuel costs took their toll. Excluding fuel, Northwest's unit costs rose 2 percent. The company plans to discuss competitive labor agreements with union leadership "in the near future."
American Airlines dramatically improved first-quarter results, posting a $166 million loss versus a $1 billion loss a year earlier. "Our success in removing costs from the operation has paved the way for our improved results and has given us the ability to stand and fight rather than retreat and shrink," said AMR president and CEO Gerard Arpey.
Over at Continental, the carrier posted a $124 million loss after a profitable second half of 2003. Like its largest peers, the carrier reported yield declines in all regions. It also said revenue from business travelers continued to erode, finishing the quarter at just 32 percent of total revenues.
Southwest Airlines surprised nobody with yet another profit, posting a quarterly net income of $26 million. It grew revenues, traffic, capacity and yield, while total expenses and unit costs also were on the rise.
America West Airlines also managed a tiny profit, its fourth consecutive positive quarter. "To break even in the seasonally slow first quarter, while operating in an industry plagued by extremely high fuel costs, excess supply and sluggish demand is extremely gratifying," said CEO and chairman Doug Parker.
Despite a larger fuel tab, AWA reduced operating costs by 8.5 percent—the 7.59 cents per available seat mile beat Southwest's. It finished the quarter with $545 million in cash, a record first-quarter cash balance.
Fuel Foils Frugality
The common concern throughout the industry—and a campaign issue for President Bush and Democratic presidential nominee-to-be John Kerry—continues to be high fuel costs (see chart). The Organization of Petroleum Exporting Countries on April 1 reduced its production ceiling by one million barrels a day, further pressuring prices upward. At the same time, most major U.S. carriers have few if any fuel hedges in place and therefore are heavily exposed to fuel price fluctuations.
"It is the prolonged level of such high prices that makes this go-around so painful for U.S. airlines and other businesses that run on fuel," said John Heimlech, chief economist for the Air Transport Association. Heimlech last month said the full-year price forecast for fuel was $33 per barrel, $10 higher than prices during the first Gulf War and $2 above last year's average price.
"This economy and this industry do not work at $38 per barrel oil. There will be a sorting out effect," said Continental Airlines chairman and CEO Gordon Bethune, referring to the financially weakest airlines. "I know we say this every year, but I think it's coming sooner than later."
Continental last week again upped the fuel surcharge it applies on tickets and quickly was matched by American and Delta. At press time, however, it appeared the fuel surcharge would be rescinded and replaced by a 3 percent hike on lower-end fares, initiated by traditional fare hike spoiler Northwest. Numerous attempts by major carriers to raise fares in the past year have failed to stick.
On a worldwide scale, the industry will pay $67 billion for fuel this year, up $8 billion from 2003, according to the International Air Transport Association.