Despite Fuel, Some Carriers Post Rare Quarterly Profits

Most airlines reporting second-quarter earnings last month saw improvements—and some profits—amid surging fuel costs and fierce pricing competition, following quarters of losses.

However, while JetBlue, American and Continental airlines reported profits, Delta and Northwest witnessed losses—another blow that could push the carriers into bankruptcy protection.

Northwest's avoidance of bankruptcy protection hinges on labor agreements, which thus far have gone against the airline's favor. Northwest is in a 30-day cooling off period from a dispute with the Aircraft Mechanics Fraternal Association. "We need to rapidly achieve at least $1.1 billion in labor cost savings and resolve our pension plan challenges by freezing our defined benefit pension plans and obtaining federal legislation that addresses existing problems in the pension laws. Failing to do so will force Northwest to consider other alternatives, including filing under Chapter 11 of the U.S. Bankruptcy Code," said Doug Steenland, president and CEO of Northwest, which last week reported a second-quarter net loss of $225 million.

Delta reported a $382 million loss for the quarter, which nearly matched what the airline said was a $385 million, or 57.5 percent, increase in fuel costs from the same period last year. Although Delta CEO Gerald Grinstein during the second-quarter conference call said he remained committed to resolving financial issues outside of bankruptcy, news reports cited pressure on the carrier to file sooner versus later.

Delta's Grinstein said that while disappointing, "results from the June quarter demonstrate that the transformation plan is progressing," citing a 14.3 percent drop in mainline cost per available seat mile, excluding fuel and special items for the quarter. While Delta executives acknowledged they must step up the pace of their transformation, Grinstein pointed to recent fuel-conservation measures, efforts last month to reset SimpliFare caps $100 higher to reflect rapidly escalating fuel prices, and last month's senior management appointments, including promoting Jim Whitehurst to COO and bringing back Delta veteran Ed Bastion as CFO. Delta's posting of quarterly losses was narrower in than the same period last year.

Continental's revenue jumped 11.8 percent to $2.6 billion, leaving a net income of $100 million. American posted a $58 million profit for the second quarter. JetBlue's net income for the quarter was $12.2 million, compared with second-quarter 2004 net income of $21.5 million.

Continental chairman and CEO Larry Kellner said April reductions in pay and benefits enabled the carrier to turn a modest profit for the quarter. AA executives cited teamwork and record load factors for each month of the second quarter, which benefited from robust business travel generated by lower fares and progress in corporate agreements.

"When we came in to this year and talked about the Delta pricing initiative," AMR Chairman and CEO Gerard Arpey said, "we cautioned folks that it wouldn't have as negative an impact as some thought possible. With this new fare structure, we are stimulating business traffic in particular. Fare restructure has stimulated both business and leisure, but we're seeing double-digit increases in business travel.

"Despite the unwelcome addition of $434 million in fuel prices, we earned a net second-quarter profit, which represents our first quarterly profit without the benefit of special items since the fourth quarter of 2000," Arpey said. "Demand for the product is elastic, but where oil is today, we need to get to the point where we are making reasonable levels of profit."

"I recognize that second-quarter profitability needs to be much higher if we are to return our company to a position of financial strength," Arpey said, "Oil prices look like they will be higher in the second half of the year and fares continue to be low by historical standards."

Similarly, JetBlue chairman and CEO David Neeleman cited strong demand and said, "our crewmembers pulled through to deliver a solid performance in a tough quarter characterized by a 55 percent increase year-over-year in the cost of airline fuel."

Even though Continental expects the pay and benefit reductions it has put in place for various work groups to achieve about $418 million in annual savings, "we still expect to have a substantial loss for this year," executive vice president and CFO Jeff Misner said. Kellner said the airline industry is likely to bring further bankruptcy cases this year. "I don't believe we're out of the bankruptcy cycle," Kellner said. "We'll see one or two more bankruptcies."