US airlines reported strong earnings in the third quarter after being aided by lower than expected fuel prices, even as massive flight cancellations resulting from hurricane Sandy in October cast a cloud over airline's earnings for the rest of 2012.
US carriers were largely profitable for the three months that ended on 30 September, with Delta Air Lines posting a record third quarter result of $1.05 billion in net profit. US Airways also reported its best quarterly result in its history, posting net income of $192 million.
Lower fuel prices were attributed as a key factor behind the improved earnings, providing some relief to airlines after a second quarter in which carriers felt the pain of volatile fuel price increases.
While pressure from oil prices eased in the third quarter, some airlines continue to bear the cost of ongoing initiatives or one-off items. United Airlines incurred a $454 million charge related to its new collective bargaining agreement with its pilots as well as its ongoing integration costs associated with the merger between United and Continental Airlines.
US CARRIER THIRD QUARTER SNAPSHOT (July-September 2012)
| || || || |
|Alaska Air Group ||$1.2bn (+6%) ||$270m ||$163 |
|Allegiant Air ||$217m (+13%) ||$29m ||$17m|
|AMR/American ||$6.4bn (+1%) ||$51m ||-$238m|
|Delta Airline Lines ||$9.9bn (+1%) ||$1.3bn ||$1.0bn |
|Hawaiian Airline ||$549m (+21%) ||$75m ||$45m |
|JetBlue Airways ||$1.3bn (+10%) ||$113m ||$45m |
|Republic Airways Holdings ||$713m (-7%) ||$74m ||$26m |
|Southwest Airlines ||$4.3bn (flat) ||$51m ||$16m |
|Spirit Airlines ||$342m (+19%) ||$50m ||$31m |
|United-Continental ||$9.9bn (-3%) ||$200m ||$6m |
|US Airways Group ||$3.5nb (+3%) ||$268m ||$245m|
Dallas-based Southwest Airlines recorded $145 million in costs in the third quarter from its earlier agreement to transfer 88 Boeing 717s to Delta. The overall cost of the transfer is estimated to be $550 million.
Low-cost carrier Spirit Airlines continues to account for the costs from an ongoing seat maintenance programme, adding $2.3 million in start-up charges to its third quarter expenses. Spirit will incur a further $1.5 million in expenses related to the programme in the fourth quarter but expects unit costs to be down 2% to 3% in the last three months of the year.
Even as fuel prices provide some relief, airlines are not taking any chances and are continuing to emphasise a strong focus on cost cuts and disciplined growth in the fourth quarter and beyond.
Southwest announced in its third quarter earnings call that it aims to slash spending by $100 million in 2013, despite easing cost pressures. The carrier posted net income of $16 million during the period, but its executives have reiterated that they are not pleased with inflationary pressures on the carrier's costs.
Southwest chief executive Gary Kelly said the carrier will look at ways to achieve the $100 million savings, including reducing supplier costs, being more efficient and not replacing staff who leave. The carrier has repeatedly said that it wants to reach a 15% return on investment target, a goal that it expects to hit in 2013.
Delta, which plans to cut $1 billion from its expenses by end-2013, made progress on this goal in the third quarter with several initiatives. These include launching a competition between Bombardier and Embraer for a 70-aircraft order and beginning production at its Trainer oil refinery in Pennsylvania. These projects are expected to bear fruit in the second half of 2013, Delta's chief financial officer Paul Jacobson said during an earnings call.
Aside from cost discipline, airlines are emphasising prudent capacity growth in the last quarter of the year and beyond. Delta is forecasting a decline of between 1% and 3% in available seat miles in the fourth quarter. Southwest, which has emphasised flat to downwards capacity growth, says that it expects full-year available seat miles to "approximate" the combined capacity of Southwest and its subsidiary AirTran in 2011. Southwest closed on its acquisition of AirTran in May 2011.
Alaska Airlines expects to grow capacity by 7% to 8% in 2013, but says that it will do this with increased focus on seasonal traffic flows.
Some airlines, like New York-based JetBlue, are focusing growth out of key cities in their network. JetBlue says Boston, Latin America and the Caribbean will continue to be key drivers of growth in the coming years. Capacity out of Boston is expected to increase by 11% year-on-year in the fourth quarter, says the airline's chief executive Dave Barger.
US carriers largely reported a favourable outlook for forward bookings in the fourth quarter, but this could be hindered by hurricane Sandy which led to cancellations of about 20,000 flights in the eastern USA. Sandy hit on 29 October, as US carriers were still rolling out their third quarter financial results.
Most airlines have not quantified their estimated losses from the storm, although Delta has said it recorded a $45 million hit to its October revenues and expects a less severe impact on its November results. The SkyTeam carrier cancelled more than 3,500 flights. Analysts have said Sandy could cost airlines as much as $250 million in the fourth quarter.
Carriers that reported their third quarter earnings post-Sandy have indicated that the damage could be severe, with Spirit's chief executive Ben Baldanza saying on 31 October that he expects Sandy to have a "significant negative" impact on the airline's fourth quarter results. The carrier cancelled 136 flights as a result of the hurricane.
Additional reporting by Edward Russell