ANALYSIS: US carriers post strong Q1 despite slump in March

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Most US carriers posted positive financial results in the first quarter, even as demand began to slump towards the end of what is traditionally a weaker quarter for the airline industry.

US Airways reported a record net profit of $55 million excluding special items for the quarter, while Delta Air Lines posted its first March quarter profit since 2000 with a net profit of $85 million.

Alaska Air Group's net profit of $44 million was also a record for the airline in the first quarter, in a reversal from what is generally observed by the carrier. Summing up the sentiments of many of his fellow airline executives, Alaska chief executive Brad Tilden says in an earnings call on 25 April: "In many of the 22 years that I've been here, we've posted sizable losses in the first quarter that have required us to dig out of the hole in the second and third quarters."

Low-cost carriers Southwest Airlines and JetBlue Airways also reported strong quarters, despite softening in some parts of the quarter. JetBlue saw demand hit by shortened or cancelled school vacations in February, due to Hurricane Sandy in October 2012 which affected the eastern USA. Schools in New York, where JetBlue is based, cancelled part of a school break in February to make up for days lost during Sandy.

"With over 50% of our capacity in the New York metropolitan area, we estimate Hurricane Sandy reduced revenue in February by approximately $25 million," says JetBlue chief executive Dave Barger during a 25 April earnings call.

Southwest, which reported record first quarter revenues of $4.1 billion, hit a soft patch in March that has continued into the start of the second quarter - a trend also observed by its mainline counterparts. Southwest chief executive Gary Kelly attributes this to concerns over US income tax hikes and cuts to the US federal government budget, also known as sequestration.

At Alaska, advance load factors were down about one point in April and flat in May and June, says Tilden, who also cites sequestration and the related air traffic control-associated flight delays as factors that have put pressure on April's passenger unit revenues. "We're taking steps now to improve yields, and we're evaluating whether more changes to fall capacity is needed," says Tilden.

United Airlines observed a decline of about 25% in government contract travel in the first quarter, and says it expects this to continue in the "near term".

Delta's bookings towards the tail-end of the first quarter fell and the SkyTeam carrier expects unit revenues in the second quarter to be flat to down slightly, says the airline's chief executive Richard Anderson on a 23 April earnings call.

Major US carriers first quarter 2013 snapshot

Revenues (change) Operating profit/ (loss) Net profit / (loss)
Delta Air Lines $8.5b (+1%) $222m (-42%) $7m
United Airlines $8.7b (+1.4%) ($264m) ($417m)
US Airways $3.4b (+3.5%) $103m $44m
AMR $6.1b (+1%) $52m ($341m)
Alaska Air Group $1.1b (+9%) $64m $37m
Southwest Airlines $4.1b (+2.3%) $70m $59m
JetBlue Airways $1.3b (+8%) $59m $14m

 

Lower than expected fuel prices provided airlines some relief during the first quarter, especially when demand began to soften towards the end. "Assuming that these fuel cost trends also continue along with the May, June booking trends, we'll have a very strong second quarter," says Southwest's Kelly. The airline's first quarter economic fuel price was $3.29 per gallon including taxes, which was in line with expectations and "significantly below" the all-time high of $3.44 per gallon in the first quarter of 2012, says Southwest's chief financial officer Tammy Romo.

Delta's Anderson, pointing to a decline in Brent crude to $99 per barrel from $113, says this would translate into a $1.3 billion annual cost reduction for Delta. "We anticipate the lower fuel costs, combined with prudent capacity management, will more than offset any revenue softness," he adds.

Among the US carriers. United had the toughest quarter as it struggled with operational difficulties and issues related to its merger with Continental Airlines. United reported a loss of $325 million.

The airline's chief executive Jeff Smisek says in a 25 April earnings call that operational reliability is back in track, with the carrier reporting the best mainline on-time performance rate of 81% in a decade.

Going into the second quarter, US carriers continue to keep a close watch on capacity. Delta expects second quarter capacity to be flat to up one point, while United estimates that second quarter capacity will fall by between 1.7% and 2.7% year on year.

US Airways is forecasting capacity growth for the full year, but says most of this will be through upgauging of aircraft. The airline's president Scott Kirby says in a 23 April earnings call that the airline has flexibility to trim capacity going forward.

Southwest expects to grow capacity "modestly" in the 2% range in 2013 due to a reconfiguration project to add more seats on its aircraft. It estimates a 3% growth in capacity in the second quarter and a 1% growth in the third quarter.