US airlines posted nearly universal operating profits in the fourth quarter, that largely held to Wall Street estimates and set many carriers up for a prosperous 2014.
“Save for meaningfully improved American Airlines Group guidance, earnings season was comparatively benign,” says Jamie Baker, an analyst at JP Morgan, in a research note on US airlines fourth quarter earnings.
Unit revenue growth for the quarter averaged about 3%, fuel prices were relatively stable and capacity remained in check, he writes.
Only US Airways, which merged with American Airlines on 9 December 2013, reported an operating loss of $4 million during the fourth quarter. American reported a $292 million operating profit on $6.44 billion in operating revenue.
Together American and US Airways generated a $288 million operating profit on $9.98 billion in operating revenue, which equals a 2.3% operating margin. However, they reported a net loss of $1.95 billion due to $2.2 billion in net reorganisation expenses.
The newly merged Fort Worth, Texas-based carrier is “off to a strong start” with its earnings, according to Michael Linenberg, an analyst at Deutsche Bank. He added that they beat the bank’s net profit forecast by more than $100 million.
American’s passenger unit revenues rose 6%, unit costs excluding fuel and special items 0.9% and capacity 3.6% during the quarter.
“The early returns on our merger are very positive," said Doug Parker, chief executive of the group, in January. "We have much work ahead, but believe we are on our way to restoring American as the greatest airline in the world.”
American and US Airways began codesharing in January, which included more than 70,000 joint itineraries in the first three weeks, according to president Scott Kirby. He says they anticipate generating $400 million in additional revenue through various scheduling and aircraft configuration projects in 2014.
Delta Air Lines remained the profit leader in the fourth quarter. The Atlanta-based carrier posted a $701 million operating profit – nearly double its result in 2012 – on $9.1 billion in operating revenues. Its operating margin increased by 3.6 percentage points to 7.7%.
Richard Anderson, chief executive of the Atlanta-based carrier, attributed what he calls “solid margin improvements” to the on-going programme to replace inefficient 50-seat regional jets with larger 76-seat regional jets or mainline aircraft, during an earnings call in January.
Delta removed at least 53 50-seat aircraft and added 12 larger Bombardier CRJ900s to its regional fleet, and 12 Boeing 717-200s to its mainline fleet during the second half of 2013.
Passenger unit revenue rose 3%, unit costs excluding fuel and special items 1% and capacity 3% at the airline in the fourth quarter.
Delta’s Trainer Refinery again lost money. The facility lost $46 million in the quarter that, combined with settled hedges, resulted in an average jet fuel cost of $3.07 per gallon for the carrier. This compares to $3.06 per gallon at the combined American and US Airways, $3.05 per gallon at Southwest Airlines and $3.09 per gallon at United Airlines.
Executives at the airline anticipate a “modest profit” at Trainer in 2014, and maintain that it was a wise investment.
“I think we’ve had a couple of hiccups, if you will, in the first year,” said Paul Jacobson, chief financial officer of Delta, in an interview with Airline Business in November 2013. “But when you look at it overall one of the key reasons that the profitability has fallen short of expectations is that jet crack [spreads] have come down, which is ultimately the reason for doing it.”
United reported an operating profit of $235 million in the fourth quarter, reversing a $465 million operating loss the year before. Its operating margin was 2.5% on $9.33 billion in operating revenue.
Passenger unit revenue rose 3.2%, unit costs excluding fuel and special charges 1.9% and capacity 2.6% during the period.
The Chicago-based carrier’s earnings were ahead of Wall Street estimates, said Glenn Engel, an analyst at Bank of America Merrill Lynch, in a recent report. However, he flags “sluggish” international corporate travel as a concern for first quarter earnings.
“We laid the groundwork to be much more efficient in 2014 and beyond,” said John Rainey, chief financial officer of United, in January. “[However] we’re not yet even close to where we want to be.”
He says that revenue generating and cost reduction initiatives that began in the second half of 2013 will accelerate in 2014.
Southwest reported an operating profit of $386 million on $4.43 billion in operating revenues during the fourth quarter. Its operating margin improved 6.5 percentage points to 8.7%.
Passenger unit revenues increased 4.2% and capacity 2.2%, while unit costs excluding fuel, special items and profit sharing decreased 0.4% in the period.
“I'm especially happy with these results considering that there's such a drag associated with integrating another airline,” says Gary Kelly, chairman, president and chief executive of Dallas-based Southwest, in January. “To have record results, knowing that there's a lot of work and inefficiencies underlying that, again is, I think, a huge accomplishment.”
He adds that he anticipates “a lot of tailwinds” for the low-fare carrier as it completes the integration of AirTran Airways in 2014.
The mainline carriers provided measured guidance for the first quarter, following their strong performance at the end of 2013. Unit cost growth is expected to spike at American and United in the first quarter, before slowing during the rest of the year.
American anticipates a 3% to 5% increase and United a 3.5% to 4.5% increase in the first quarter.
Passenger unit revenues are expected to increase by 2% to 4% at American, 3% at Delta and be flat to up 2% at United during the quarter.
Capacity discipline will remain king. Delta anticipates a 2% to 3% increase largely from its regional jet replacement programme, and United a 0.3% to 1.3% increase after a 0.6 percentage point reduction due to winter storms in January. American anticipates an about 3.2% increase based on available seat mile (ASM) guidance it provided in January.
Alaska Airlines, Allegiant Air, Hawaiian Airlines and JetBlue Airways all came in with fourth quarter profits. Despite carrying less than 20% of all passengers in the USA, these carriers also generated some of the strongest margins in the country.
Las Vegas-based Allegiant led US carriers with a 12.7% operating margin during the quarter. It reported an operating profit of $30 million on $238 million in operating revenues.
A hallmark of the carrier is flying used aircraft with low capital expenditure costs primarily during peak weekly travel days, for example Thursdays through Mondays. Aircraft are then not generating lower returns – or racking up operating expenses – when demand is low, executives say.
Total passenger unit revenues increased 1.9%, unit costs excluding fuel 6.2% and capacity 4.4% at Allegiant during the quarter.
The airline attributes an increase in salary and benefit expenses, marketing costs and leased aircraft for the rise in unit costs.
Alaska Airlines reported a 10.7% operating margin during the quarter, second only to Allegiant. The Seattle-based carrier generated a $130 million operating profit on $1.21 billion in operating revenues during the period.
Passenger unit revenue rose 0.2%, unit costs excluding fuel and fleet transition costs 1% and capacity 5.1% in the quarter.
The results came as Alaska faced increased competition on its home turf at Seattle Tacoma International airport from codeshare partner Delta Air Lines. Executives have said that the airline will defend its key markets “vigorously” and they expect revenues from the codeshare to decrease during 2014.
JetBlue Airways reported an operating profit of $115 million on $1.37 billion in operating revenues during the fourth quarter, resulting in an 8.4% operating margin. Passenger unit revenues rose 5.3%, unit costs excluding fuel and profit sharing 0.6% and capacity 8.3%.
Passenger unit revenue increased 5.3%, unit costs excluding fuel and profit sharing 0.6% and capacity 8.3% at the New York-based carrier.
Hawaiian Airlines saw an operating profit of $34 million on operating revenues of $532 million during the quarter, which resulted in an operating margin of 6.4%. Passenger unit revenue rose 3.7%, unit costs excluding fuel 1.4% and capacity 4.7%.
The Honolulu-based carrier has ended a multi-year period of rapid growth – and increased costs – in 2013 and plans to mature its network, revenues and lower its costs in 2014.
“2014 will be marked by the maturing of our network,” said Mark Dunkerley, president and chief executive of Hawaiian, in January. “Our focus shifts slightly to the task of maturing all that we have started in the recent past, and we expect this effort will enhance our unit revenues in the coming year.”