Continental, Southwest, Alaska Airlines Alone In Black

<B>Continental, Southwest, Alaska Airlines Alone In Black</B>

By David Jonas

Brutal second-quarter earnings reports from major U.S. airlines poured in earlier this month as the weak economy continued to take its toll on bottom lines. In some cases, profits in the hundreds of millions just a year ago completely have been washed away by decaying business traffic and supplanted by equally high, or higher, losses.

Most expect these horrific numbers to continue at least through the third quarter, but to stop the bleeding, carriers have trimmed capacity, retired older aircraft earlier than planned, cut some inflight amenities, deferred capital spending, frozen all new hiring and enticed passengers to use lower-cost distribution channels.

UBS Warburg analyst Sam Buttrick estimated that corporate spending on air travel fell an estimated 12 percent, driving the industry's first second-quarter loss in almost a decade. He added that carriers' ability to restore the business travel value proposition "would require a level of innovative product and pricing management that would seem to go beyond current capabilities."

However, Continental, Southwest and Alaska airlines each posted a profit for the quarter. Market leader Southwest raked in $175.6 million, nearly an 8 percent year-over-year drop but still vastly better than the next most profitable airline. Though the carrier expects lower unit revenues in the months ahead, aggressive fuel hedging should keep it "solidly profitable in the third quarter."

Continental saw its quarterly net income plummet nearly 72 percent, to $42 million. On the positive side, the carrier's cost per available seat mile dropped 3.5 percent. Commission expenses fell a whopping 25 percent in the quarter, attributable to more corporate net fares and a general shift in distribution channels to the Internet. "We tend to pay the highest commissions on business traffic, so I wouldn't mind if commission costs went up as long as they are accompanied by an uptick in business traffic," said Continental president Larry Kellner.

Indeed, business traffic represented just 43.8 percent of total revenues, "a significant decline" of 4.3 points from a year earlier, pressuring average passenger yield down 4.9 percent. "Clearly, we saw the revenue side of the picture weakening," Kellner said. "Based on advanced bookings in the third quarter, we don't see it getting worse, but see these levels continuing."

Alaska called itself "fortunate" to eke out just under $5 million in profits. It cited an increase in leisure travelers that offset slowing business traffic, as well as its much-improved operational performance.

UAL Corp., parent of United Airlines, again suffered the most of all majors, posting a $292 million loss. Should its deal to acquire US Airways fail as expected, second-quarter losses would top $400 million. The company again blamed a "disproportionate effect of the weaker economy on business travel," particularly on the West Coast and in Asia.

With its year-to-date losses swelling over $600 million, or $11.47 per share, United has taken on numerous cost-cutting initiatives, including closures of seven smaller stations. Fourth-quarter capacity has been reduced from a 5 percent growth to a 1 percent reduction. Full-year 2002 capacity also will be cut by a percentage point. In projecting its full-year loss to reach $925 million, Buttrick said, "UAL likely will gain the dubious distinction of having the largest annual net loss of any major carrier ever."

Its acquisition target US Airways fared much better and beat analyst expectations by a wide margin, but parent US Airways Group still posted a quarterly loss of $24 million, compared with an $80 million profit in last year's second quarter. The company cited continued pressure from both low-cost competitors and network carriers, compounded by the weak economy. The carrier's unit revenues slid 11 percent, year over year, and passenger yield dropped more than 10 percent. On a positive note, cost-containment measures drove unit costs down almost 4 percent.

American Airlines parent AMR Corp. dropped $105 million in the quarter. Factoring in one-time charges, that figure exploded to $507 million. All told, AMR brought in $321 million in profits a year ago. Mainline passenger revenues declined more than 5 percent and systemwide load factor slipped 4 points. CEO Don Carty indicated that a continued reduction in business travel demand would keep third-quarter and full-year earnings in the red.

Along with the slow economy, Delta Air Lines faced labor troubles in the quarter; the now-settled pilots strike at its Comair subsidiary cost the carrier $195 million. The carrier, which reported a quarterly net loss of $123 million before special items, therefore concluded it would have turned a profit absent that strike. At the same time, Delta's primary rival out of the Atlanta hub, AirTran Airways, announced a profitable quarter (see story, page 1).

At Northwest Airlines, losses totaled $55 million, compared with a $115 million profit in last year's second quarter. Unit revenues eroded 8 percent, while unit costs grew 3.4 percent. "It is imperative that we reexamine all aspects of our business," said CFO Mickey Foret. Northwest later announced a fresh round of cost-cutting aimed at shaving another $135 million in expenses. Measures include new capacity cuts, facility closures and the elimination of 1,500 employee positions.

Meanwhile, America West Airlines parent America West Holdings Corp. reported a quarterly net loss of $42.5 million, inclusive of all special charges, compared with a $33.5 million profit a year ago. Passenger yield fell 8 percent, pushing unit revenues down 5.8 percent. However, the carrier's customer service numbers improved significantly. On-time performance jumped nearly 9 points, to 75.2 percent, while canceled flights fell 2 percent and incidents of mishandled baggage declined 43 percent. Systemwide load factors improved 1.8 points, to 75.5 percent.