Delta and Northwest airlines today posted more deep financial losses, joining fellow major carriers American and Continental in first-quarter red ink. Airline executives said revenue gains from recent airfare hikes, while encouraging, have done little to offset crippling fuel costs. Meanwhile, several lower-cost carriers--Southwest, America West and JetBlue--each reported first-quarter net profits and highlighted comparably strong positioning within the domestic market. In America West's case, the industry is buzzing about a potential merger with bankrupt US Airways.
Delta's net loss, excluding special items, was $684 million. All told, it dropped nearly $1.1 billion, bringing total losses since early 2001 to nearly $10 billion. A government security cost reimbursement in mid-2003 led to Delta's only net quarterly profit during that timeframe. "The issue is simple," said CEO Gerald Grinstein. "Including fuel, Delta is not on plan, but excluding fuel, we are better than plan."
The airline said its SimpliFares initiative has led to less traffic stimulation than anticipated but also less yield erosion than anticipated. "The net result is that this initiative is on track with Delta's revenue expectations," the carrier said.
Delta's marketing partner Northwest Airlines, however, in part blamed "competitors' pricing decisions" for poor revenue performance. The carrier also cited "increasingly noncompetitive labor costs" as a factor driving an overall net loss of $458 million.
Including special items, American Airlines parent AMR yesterday posted a $162 million net loss, similar to results from last year's first quarter. Executives claim airfare reform has helped AA stimulate demand, regain market share from secondary airports used by lower-cost competitors--notably in Chicago and Miami--and improve unit revenues.
CFO James Beer also noted "very strong volume growth" in the corporate market, but at "significantly lower" yield. "The fare increases so far only will offset a fraction" of incremental fuel costs, he said.
As a result, American "will continue to attempt to pass along this extraordinary increase in fuel prices to passengers," added CEO Gerard Arpey.
At the same time, Beer said "90 percent" of revised corporate deals had been signed and returned and "we expect to get the rest back shortly. We are pleased with how swiftly this process has played out." The airline, like all major network carriers, recently began discussing contractual modifications with all corporate accounts following domestic airfare reform this winter
(BTN, March 7).
American clients also can expect the carrier to float new distribution models. "Distribution costs are under significant downward pressure as new technologies emerge," Arpey said. Noting that all AA global distribution system agreements expire next year, he said, "we will have more reasonable options moving forward." He cited a new agreement signed in March with G2 SwitchWorks, which first announced airline endorsements for its TrueConnect system last summer
(BTNonline, Aug. 25, 2004). G2 declined to comment.
Meanwhile, Continental's first-quarter loss was $184 million. Executive vice president of marketing Jim Compton said the carrier in the second quarter would benefit from revisions to corporate contracts, which are being re-calibrated to the new published fare structure
(BTN, Feb. 7).
He also said recent fare hikes would provide an annual net benefit of "$80 million to $90 million," well below the estimated $200 million annual hit from Delta-led fare reform. Even so, "we are still very positive about the Delta relationship and what it does for our network," said Continental CEO Larry Kellner. Continental in 2002 severed ties with then-partner America West when it introduced airfare reform
(BTNonline, March 28, 2002). Kellner also said, "we are not looking at bankruptcy as an option," but reiterated forecasts for a full-year loss.
As expected, lower-cost carriers again finished with more positive first-quarter results. America West, for example, posted a relatively small $10.8 million loss, excluding special items, and overall achieved a $33.6 million profit on improving revenue trends. In fact, the company said March unit revenue performance represented a company record.
Meanwhile, without commenting specifically on a potential America West-US Airways transaction, AWA CEO Doug Parker said the airline would participate in consolidation "to the extent it makes sense." He also suggested "the regulatory environment is much more open to airlines helping themselves."
Wall Street analysts yesterday generally were not enthusiastic about an AWA-US Airways combination. The Benchmark Co.'s Helane Becker said it is "somewhat ill-advised," citing US Airways' $800 million in unhedged fuel expenses. J.P. Morgan Securities' Jamie Baker said an outright merger is "unlikely, with financing and labor viewed as the primary impediments." UBS' Robert Ashcroft was less cynical. "Up to a point, we believe the idea has merit," he said, highlighting the carriers' complementary route networks and mutual support from both General Electric and the Air Transportation Stabilization Board.
Meanwhile, Southwest Airlines last week posted $76 million in positive net earnings, remaining as the country's most profitable commercial passenger carrier. JetBlue Airways managed a $7 million first-quarter net profit, less than half of last year's first-quarter result.
Both Southwest and JetBlue in the first quarter enacted rare fare hikes to offset fuel. "Yesterday, we put in another $5 increase in most fare buckets in transcon markets," said JetBlue CEO David Neeleman this morning. "These $5 increases here and there go a long way."