Despite the crippling cost of oil, the U.S. airline industry finally is showing signs of life as strong demand keeps planes relatively full and recent airfare hikes push revenue in a positive direction. Certain carriers—in addition to routinely profitable Southwest, AirTran and JetBlue—actually may report net gains for the second quarter when they divulge financial performance this week.
The situation is less rosy for carriers that face liquidity, labor and bankruptcy-related challenges
(see story). Nevertheless, some recent indicators suggest the industry at large is pulling out of a years-long tailspin. Revenue trends are firming after years of decline. The Air Transport Association said the industry's domestic passenger yield increased in May, year over year. The improvement, albeit marginal, was the first of 2005.
More yield improvements may materialize following Delta Air Lines' decision last week to raise fare caps. Citing excessively high fuel costs, the carrier said it raised by $100 to $599 and $699, respectively, the ceiling on domestic economy and first class fares, abandoning lower caps established in January
(BTN, Jan. 17). The changes affect full-fare walk-up fares and certain three-day advance purchases. The airline said it maintains "popular features of no Saturday-night stays and flexible change rules."
"When Delta launched SimpliFares in January, crude oil was selling at $43 per barrel compared to as much as $61 per barrel in recent weeks," said Paul Matsen, senior vice president and chief marketing officer. "Despite our best intentions to keep the current fare caps in place, we have been forced to find ways to offset this dramatic spike in costs."
Success of fresh fare hikes in the coming weeks and months therefore is far more likely than at this time last year. "As long as demand does not come down in a free-fall, we believe there is some stickiness in the fare price increases when and if oil prices come down," said Calyon Securities analysts. "We have seen some resilience over the last 12 months in demand for travel relative to the economy and the transition from summer to fall will really depict the elasticity in demand."
"We continue to look for changes to the current revenue structure, especially a change in the minimum-stay requirement," added analyst Helane Becker with The Benchmark Co. "Even if airfares don't go up in the fall, we would hope that the airlines will go back to a minimum-stay requirement, because too many business travelers now are being treated like leisure travelers."
Becker suggested that a change in the minimum-stay requirement to at least two nights on those tickets without such restrictions would add as much as $500 million to annual industry revenues.
Meanwhile, the average cost per domestic passenger name record, as measured by airfare auditing firm Topaz International, rose to $595 in June from $550 in May. Several other travel-cost measurements—as well as fare levels, in general—have been on the rise since the beginning of the year
(BTN, June 20).Traffic levels, too, gradually have been restored. According to the most recent reports issued by U.S. carriers, all domestic airlines increased traffic levels and total passenger counts in the first half of the year, excluding bankrupt United and ATA Airlines. ATA and Southwest Airlines were the only two of the 12 largest U.S. carriers to report lower first-half load factors. In fact, United said its 88.1 percent load factor in the month of June was its highest ever and AirTran said June enplanements and traffic levels set company records.
"We are encouraged by continued strong performance looking forward through the summer," said AirTran president and COO Robert Fornaro.
International travel has been particularly strong as major carriers increase capacity in some regions by double-digit percentages to keep pace with growing demand
(see story).Meanwhile, Southwest as usual last week led the earnings parade with impressive numbers. In its 57th consecutive profitable quarter, the airline generated net income of $159 million—well ahead of last year—and lowered costs, despite higher fuel bills. Analysts said Alaska, America West and perhaps even American and Continental could report positive earnings for the second quarter.
Though most major carriers still are likely to finish in the red for the full year, the industry has a few items in its favor. The federal government, for example, is examining pension reform, resulting in part from the currently untenable situation for certain airline pension programs.