ANALYSIS: Strong Q2 buoys US airlines' outlook

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US airlines mostly reported stronger year-on-year second quarter results, and expect the strength to continue into the third quarter.

Mainline carriers Delta Air Lines and American Airlines Group - the latter now stronger after combining with US Airways - posted the highest operating profits with $1.6 billion and $1.4 billion respectively.

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Their peer United Airlines, after widening its first quarter operating loss, beat analysts' expectations with an operating profit of $906 million in the second quarter. United chief executive Jeff Smisek called the profit "progress" but acknowledges that work still needs to be done as the carrier continues to underperform following its merger with Continental Airlines in 2012.

In the low-cost category, Southwest Airlines, JetBlue Airways and Spirit Airlines all reported record second quarter showings. Southwest's operating revenues of $5 billion were a record for the period, while JetBlue's $1.5 billion in revenues were also an all-time high for the quarter. Spirit reported $499 million in operating revenue, up 23% year-on-year.

Not all US carriers reported similar strength in their second quarter performances. Regional carrier SkyWest posted its second quarterly loss in a row, blaming "financial bleeding" at subsidiary ExpressJet Airlines. Regional peer Republic Airways Holdings was profitable, having benefited from the upgauging to larger regional jets from 50-seaters.

US airlines largely expressed optimism on revenue strength in the third quarter. Delta chief executive Richard Anderson says the airline will post "even better results" in the current period. American expects a hit to its passenger unit revenues in the second half of 2014 due to drastic cuts to its Venezuela capacity. The Oneworld carrier expects system passenger revenue per available seat mile (PRASM) to grow 1-3% in the third quarter, compared with 2-4% at both Delta and United.

United credited its revenue generating and cost reduction programmes for the improved guidance.

Among the low-cost carriers, Spirit says it expects the third quarter to be "good" but was quick to note that seven new aircraft deliveries that will arrive later this year are coming at a weaker period in terms of seasonality. "Unusually strong" unit revenues in the third quarter of 2013 will also lead to a tough comparison for the same period this year, said Spirit chief executive Ben Baldanza.

Southwest reported a strong outlook for the third quarter, forecasting that PRASM will grow around 3% year-on-year, while JetBlue estimated a 2-3% PRASM growth in the period.

For some other airlines, the outlook is not as rosy. Alaska Air Group, which does not provide PRASM guidance, warned of lower than expected growth for the metric due to pressure resulting from a significant amount of capacity it is adding at Seattle to defend against competition from Delta.

Republic says its third quarter pre-tax margin is expected to be lower than in the second quarter, as it continues to work on cutting costs.

On the cost side, US carriers continue to exercise discipline on keeping expenses in check. Delta expects cost per available seat mile (CASM) excluding fuel and special items to stay flat or grow up to 2% in the third quarter, while United forecasts that this will grow 1-2% - in line with its goal of keeping cost growth below 2%.

Labour costs and other expenses are expected to contribute to higher CASM in the third quarter for some airlines, such as Spirit, where the metric is forecasted to be up 1.7-2.7%. Spirit chief financial officer Ted Christie attributes the hike to the hiring and training of flight crew for the seven additional A320s that will join the airline's fleet later this year.

New labour agreements, higher maintenance costs and capacity cuts will contribute to higher mainline CASM excluding fuel and special items in the fourth quarter for American, which now expects a 1-3% increase - two percentage points higher than previous guidance. Mainline CASM excluding fuel and items remain unchanged at 1-3% growth in the third quarter.

At JetBlue, higher pilot compensation and costs related to new pilot rest rules will drive three quarters of an expected 1-3% increase in CASM excluding fuel and profit sharing in the third quarter.