Carriers Report A Mean Season

<B>Carriers Report A Mean Season</B>

By David Jonas

Labor challenges, fuel costs and severe weather continue to plague the nation's major air carriers, resulting in generally weaker financial results, especially during a tumultuous fourth quarter that saw only three airlines turn a profit.

While Southwest and Continental Airlines had healthy quarterly and year-end numbers, most others experienced net income declines, with some--notably United Airlines--reporting losses for the quarter (see chart). That the most recent quarter lags the Y2K-hindered fourth quarter last year tells much about the financially burdened industry.

Following a year of generally strong profits, 2000 proved difficult for many. A sinking Trans World Airlines could not right itself. A similar story unfolded at US Airways. Smaller players forced out of the skies included Legend Airlines, ProAir and Tower Air. Even the world's largest carrier, United, took the year on the nose.

The outlook for 2001 shows little improvement. Some carriers conceded high-yield business traffic is on the decline and UBS Warburg analyst Sam Buttrick, citing "mounting anecdotes about corporate travel cutbacks," said, "More diligent corporate spending will be evident by the time the March revenue rolls around."

Both fuel and labor certainly will continue to take their tolls. However, some carriers--American Airlines, Continental, Delta Air Lines and Southwest included--saw the writing on the wall and put in place fuel hedges as partial protection.

United, hurt by labor strife resulting in tens of thousands of flight cancellations last summer, reported full-year net earnings of just $322 million, less than half its 1999 profit.

In the fourth quarter alone, United lost $124 million, excluding non-recurring items. In 4Q99, it pulled in $100 million in profits. It was the carrier's second consecutive quarter in the red, with at least a third on the way, though United expects "a modest profit" for 2001.

United's acquisition target, US Airways, also ended the quarter in the red, dropping $89 million. Excluding one-time items, the carrier's yearly loss swelled by more than 500 percent. All told, it lost $269 million in 2000 and, aside from fuel, cited relentless low-fare competition on the East Coast.

US Airways doesn't expect to turn a profit this quarter, either, and has only minimally hedged fuel. The carrier is pinning its hopes for a brighter future on the United merger. "After all, what's Plan B at US Airways?" Buttrick asked.

America West parent America West Holdings also finished the fourth quarter in the red. For the full year, it earned just $2.1 million, down more than 98 percent from 1999.

Though Delta remained profitable, its net income for both the quarter and the full year were lower. Despite a record 120 million passengers enplaned, an operating margin of 10.4 percent and $630 million saved through fuel hedges, the carrier's net income in 2000, excluding non-recurring items, was more than 10 percent less than the $1 billion mark reached in 1999. And, like United, a contract dispute with pilots caused schedule disruptions which, combined with severe weather, cost Delta $84 million in the fourth quarter.

Looking ahead, Delta's fairly aggressive hedging strategy will give it some relief throughout the current quarter, but a proactively trimmed schedule in the face of pilot shortages will hurt revenue performance.

American parent AMR Corp. upped its yearly profits by nearly 40 percent, to $752 million. Like most others, though, it had a difficult fourth quarter in which net income slid by 35 percent, despite a revenue per available seat mile increase of 12 percent.

AMR chief Don Carty is "cautiously optimistic about 2001," but acknowledged the upcoming challenge of a softening economy. American, however, has hedged 40 percent of its expected 2001 fuel needs.

Meanwhile, fuel hedging helped Southwest, roll along to its 28th consecutive profitable year. Its $625.2 million in net income was up more than 30 percent from 1999. Its annual load factor of 70.5 was the highest in company history.

For the quarter, Southwest reported a 64.9 percent increase in net income, to $154.7 million. Revenues grew 22 percent--partially attributable to flight disruptions at Delta and United--and traffic rose 16 percent on 13 percent capacity growth. Southwest said its current 1Q01 outlook is "favorable as we continue to enjoy strong revenue momentum." Also, the carrier has hedged 80 percent of its expected 2001 fuel needs at about $22 per barrel.

Continental also had a strong showing and for the year posted a net income of $342 million. Earnings per share increased 18 percent, to $5.45. Operationally, revenue passenger miles were up nearly 7 percent while capacity grew 5 percent. Average passenger yield in 2000 was up 6 percent to 13.2 cents.

For the fourth quarter, passenger revenues rose to a record $2.3 billion and RASM grew 10 percent overall. For the first time in its history, Continental in October had a monthly business traveler mix of more than 50 percent.

Moving forward, "Continental should outperform the U.S. airline industry in 2001," according to Buttrick, citing relative labor harmony and the carrier's position as a reliable alternative relative to others involved in consolidation. Furthermore, Continental has hedged fuel costs covering about half its expected consumption for the first two quarters of 2001.

Excluding non-recurring items, Northwest Airlines was only the third carrier to post both a yearly and quarterly net income increase. However, full year fuel costs grew by $681 million contributing to an overall increase in expenses of more than 13 percent. Inclusive of all special charges, including $125 million resulting from aircraft retirements, the carrier lost $69 million in the fourth quarter, partially attributable to service disruptions tied to job actions by its mechanics.

For 2001, Northwest has no fuel hedges in place and expects to grow capacity by just 2.6 percent. "We expect the company to be seasonably unprofitable," said Buttrick.

Alaska Airlines and Trans World Airlines did not report earnings by press time, though both are expected to show significant declines.

TWA's bankruptcy proceeding, meanwhile, prompted the American Stock Exchange to remove the carrier's listing.