Strong Traffic Spurs 3rd-Quarter Airline Revenues

<FONT SIZE="+3"><B>Strong Traffic Spurs 3rd-Quarter Airline Revenues</B>

By Jay Campbell

Several major airlines reported record earnings and the industry's performance as a whole continued to improve in the September 1996 quarter, despite increasing fuel costs and other dampening factors.

Analysts attributed the success to strong traffic-which they said was surprising considering an overall increase in fares-as well as higher yields. According to the Air Transport Association, July traffic was up 8.4 percent year-over-year, while August followed with a 9 percent jump.

Meanwhile, although several airlines have placed aircraft orders or are considering doing so, system capacity growth remains modest, and many observers believe the airlines will not cause their own downturn through unnecessarily large fleet expansions.

As a result, industry forecasts are positive. In 1995, the 10 U.S. majors earned a net profit of $2.7 billion, according to Susan Donofrio, airline analyst for Nat West Securities. For 1996, her company is forecasting a net profit of $3.8 billion, and for 1997 it expects the industry to earn a net profit of $4.6 billion.

Leading the way in the 1996 third quarter were Alaska Air Group, AMR, Continental, Delta, Northwest and UAL, each of which reported their best third-quarter performances ever. USAir also reported a vast improvement over the 1995 third quarter, while Southwest, though profitable, was down year-over-year. America West and TWA reported losses.

United's $340 million in net earnings, driven by an 8.7 percent increase in operating revenues, topped the industry and represented a 40 percent improvement year-over-year. The company said the only sour notes were a weak yen and a 22 percent increase in fuel costs.

"This is the 14th consecutive quarter for which we have produced improved year-over-year results," said UAL chairman and CEO Gerald Greenwald. "The continued strong overall performance has been driven by our steady domestic passenger-unit revenue growth."

UAL will pour some of those dollars into replacing aircraft seats, refurbishing cabin interiors, upgrading entertainment systems and improving on-time performance, food and baggage handling.

A 14 percent increase in operating income pushed a 19 percent increase in net income for Delta, which saw its operating revenues increase 8 percent to $3.4 billion. Delta managed its sixth consecutive quarter of record operating profits, despite a 16 percent increase in the price of fuel.

"Delta's unit costs during the September 1996 quarter were higher than expected, largely because of fuel prices, the Olympics and costs related to exceptionally strong traffic," said chairman, president and CEO Ron Allen. "Managing costs remains a critical factor for our success, and we intend to maintain a cost advantage relative to other hub-and-spoke carriers."

Fuel costs hit AMR particularly hard, but the company still reported its highest third-quarter net earnings ever on a 2.1 percent increase in revenues. The company is one of a few that are looking to place aircraft orders soon. American is considering a replacement for its MD-11s, which will be sold to Federal Express. AMR expects fourth-quarter earnings to be dampened by 31 percent higher fuel prices.

Continental said its pre-tax, pre-special charges net income of $175 million represents the company's seventh consecutive record-breaking quarter. Passenger revenue rose 10.3 percent to $1.5 billion on a 4.2 percent increase in yield. The average load factor of 74.3 percent also was a company record.

The airline also made headway in its goal to increase the number of "coats and ties compared to backpacks and flip-flops," increasing the percentage of revenue derived from business travelers to 42.3 percent since the first of the year, compared with 37.8 percent in the same period in 1995. The goal is 50 percent.

Analysts said Continental did a better job than the rest of the industry in hedging against fuel price increases. Fuel prices rose 9.5 percent for Continental, compared with 19.5 percent for AMR.

Continental placed a $1.8 billion order for 60 B737 500s and 600s, to be delivered between July 1997 and December 1999, as replacements for 60 B737 100s and 200s and DC-9s. As a result, the fleet will contract from seven types to four.

Also planning to reduce its number of aircraft types is USAir, which is reportedly considering an order of up to 120 new jets. The airline currently flies nine different types of aircraft. The move would reduce USAir's costs, something analysts continue to say the carrier needs desperately. "We believe USAir needs to chop $1 billion in annual operating expenses in order to put the airline in line with other full-service carriers," said Nat West's Donofrio.

In another possible cost-cutting measure, USAir and its labor unions are discussing the possibility of introducing a low-cost subsidiary a la Delta Express (<I>BTN</I>, Aug. 19). But union concessions could prove daunting because the airline has been profitable in five of the past six quarters. In the third quarter, the carrier reported record operating revenues of $2.1 billion, as well as a net profit improvement of 57 percent.

Northwest reported a 9.9 percent improvement in net income and a 10.4 percent increase in operating income year-over-year. Fuel and related taxes increased 31.9 percent year-over-year, but revenues rose 6.8 percent to $2.7 billion, and the carrier set all-time records for load factor, revenue, operating income and net income.

"Northwest's third-quarter results were affected by the reimposition of the federal ticket tax, a sharp rise in the cost of fuel and a weakened yen," said CEO John Dasburg. "We expect to see the impact of these factors continue into the fourth quarter."

TWA took a $14.3 million loss after taxes and extraordinary items, and its operating income, too, was down at $26 million, compared with $45.8 million the previous year. The carrier said yield suffered partly as a result of a loss of premium-fare bookings in the wake of the Flight 800 crash in July. The accident also contributed to a decrease in advance bookings, reversing a year-to-date trend of increased load factors. Still, revenues increased by $43.5 million.

Following the announcement, TWA chairman and CEO Jeffrey Erickson said he will resign in January.

America West Airlines also reported a loss despite a 3.4 percent increase in revenues. Much of the loss resulted from a one-time charge associated with the restructuring of an aircraft order placed with Airbus, adding 10 aircraft to the order, which was originally for 24. Before the charge, the airline made $3.6 million.

Southwest didn't reach its 1995 third-quarter record of $67.7 million as its profits dropped 10.1 percent to $60.9 million, but operating revenues jumped 16.5 percent to $891.5 million. A 6.5 percent increase in costs per available seat mile was attributed to fuel prices, the 4.3 cents-per-gallon federal aviation fuel tax and higher aircraft maintenance costs. The airline admitted that its 25th anniversary fare sale this summer diluted yields.

Alaska Air Group's income of $32.8 million also was a record and represented the fifth consecutive quarter of year-over-year improvement. The carrier's CEO, John Kelly, attributed the numbers to Alaska winning the battle on the West Coast among itself, Southwest and Shuttle by United.