ANALYSIS: US mainline carriers post solid 2012

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US airlines posted solid results in 2012, with continuing capacity discipline driving up passenger unit revenues despite some cost pressures.

Delta Air Lines, Southwest Airlines, United Airlines and US Airways all posted net profits before special items for the year, with only American Airlines reporting a loss. Passenger revenue per available seat mile (PRASM) rose across the board and in most cases outpaced increases in costs per available seat mile (CASM) excluding fuel.

These airlines together flew nearly 86% of the 693.9 billion revenue passenger miles in the USA during the 10 months ending in October, according to US Department of Transportation (DOT) data.

No US carrier had a better year than Atlanta-based Delta, which reported an impressive $1.6 billion net profit before special items and a $1.0 billion net profit after items. PRASM increased 7% - the highest increase among the mainline carriers - to 13.8 cents on a 0.2% increase in traffic while capacity fell 1% compared to 2011. CASM excluding fuel rose 5%.

"This is proof that revenue initiatives and prudent capacity deployment are driving results," said Ed Bastian, president of Delta, during an earnings call on 22 January.

In addition to its revenue performance, the SkyTeam alliance member led the industry in terms of innovation. Delta implemented its slot swap at New York's LaGuardia airport with US Airways in the first half that allowed it to build a hub at the constricted airfield, announced a deal to buy the Trainer oil refinery in April to lower its jet fuel costs, forged a new pilots contract in June that allows it to restructure its regional fleet towards larger regional jets, and rounded out the year announcing the purchase of a 49% stake in Virgin Atlantic Airways that will allow it to better compete with American and British Airways between the UK and USA.

The full impact of these initiatives - whether positive or negative - will not be known for at least another year. Regardless, they set Delta apart in the market for its willingness to step outside the typical box that US carriers operate within.

US carrier results snapshot 2012

Airline

Revenues

Operating profit

Net profit

Alaska Air $4.6bn $532m $316m
AMR/American $24.9bn $107m -$1.9bn
Allegiant Air $0.9bn $132m $78m
Delta Air Lines $36.7bn $2.2bn $1.0bn
Hawaiian Airlines $2.0bn $129m $53m
JetBlue $5.0bn $376m $128m
Southwest Airlines $17.1bn $623m $421m
United-Continental $37.2bn $39m -$723m
US Airways $13.8bn $856m $637m

Source: Flightglobal Pro, financial results for year ending December 2012, net results include exceptionals

US Airways joined Delta in reporting record results last year. The Tempe, Arizona-based carrier posted a $537 million net profit before special items and a $637 million profit after. PRASM rose 4.3% to 13.92 cents - putting it ahead of Delta in terms of actual revenue - on a 2.8% increase in traffic and a 2% increase in capacity. The airline was the only mainline carrier that saw CASM excluding fuel fall during the year, with a 0.1% decrease year-on-year.

"We couldn't be happier with the performance of US Airways in 2012," said Doug Parker, chairman and chief executive of US Airways, in a statement. "These outstanding operating and revenue results combined with strong cost discipline led to record net income."

US Airways' continued adherence to the sound business plan that Parker and his management team have maintained for the past few years generated the returns. The carrier maintained its prudent capacity increases through upgauging, adding 12 Airbus A321s and three Embraer 190s while removing seven Boeing 737-300s and eight 737-400s. At the same time, it ran an efficient operation and remained focused on its core operations from Charlotte, Philadelphia, Phoenix and Washington National.

The carrier also benefitted from the slot swap with Delta. The deal allowed it to expand its focus city at National with flights to nearly 20 new destinations that, according to chief financial officer Doug Kerr, is on track to generate a $75 million improvement to its annual earnings.

US Airways' lack of fuel hedges benefitted the carrier in 2012. US Airways had the lowest average cost of jet fuel at $3.17 per gallon compared to its mainline competitors. American reported paying an average of $3.20 per gallon, Delta $3.26 per gallon, Southwest $3.28 per gallon and United $3.27 per gallon.

Fuel was initially perceived as an issue for airlines last year. Prices peaked at nearly $3.30 per gallon during the week of 24 February 2012, according to US Energy Information Administration (EIA) data. However, they soon fell and spent the remainder of the year fluctuating between a low of about $2.65 per gallon and a high of about $3.26 per gallon.

Southwest reported a $417 million net profit before special items and a $421 million profit including items last year. PRASM was up 2.6% to 12.56 cents while traffic increased 5.4% on a 6.3% increase in capacity during the period. CASM excluding fuel increased 4.2%.

"These solid earnings were achieved despite significant efforts and costs related to critical strategic initiatives," said Gary Kelly, chief executive of the Dallas-based low-cost carrier, in January. "I expect these initiatives to produce substantial returns over the next several years."

Southwest will begin to sell connecting itineraries between its flights and those of its subsidiary AirTran Airways this year, while continuing with its Evolve programme to add rows of seats to the majority of its Boeing 737 fleet and officially launching its Row 44 Ku-band wi-fi product across its fleet. All are expected to generate revenue benefits for the airline this year.

United's results were as expected - unimpressive. The Chicago-based carrier suffered from a series of technical glitches following its conversion to a single passenger service system in March, and again from operational reliability issues in June and July that resulted in it losing some corporate travellers.

"Some of our customers chose to fly other airlines during the summer when our operational performance degraded," said Jeff Smisek, chairman and chief executive of United, in October. "Just like when your preferred road to work undergoes construction, you might choose to take a detour until the road gets repaired."

"Well, the road is repaired," he concluded.

United reported a net profit excluding special items of $589 million but after factoring in merger-related and other expenses it lost $723 million in 2012. PRASM increased by a tepid 1.7% to 13.09 cents while traffic fell 1% on a 1.5% decrease in capacity compared to 2011. CASM excluding fuel increased 2.5%, eclipsing passenger unit revenue growth by nearly a percentage point.

"The year 2012 was a very difficult one for [United], with the merger of two airlines and several computer glitches, resulting in a PRASM disparity to the industry," said Helane Becker, an airline analyst at Dahlman Rose, in a January research note.

United is taking measures to reverse its performance this year. John Rainey, chief financial officer of the carrier, said that it will trim its management and administrative staff by about 6%, or 600 positions, maintain capacity discipline with an about 1% cut compared to 2012 and reduce some of the extra staffing levels that it implemented after its poor operational performance, during an earnings call in January.

American was the only mainline carrier to lose money in the USA during the year. The Fort Worth, Texas-based airline posted a $130 million loss before special items and a $1.9 billion loss including items. Reorganisation costs totalled $2.2 billion in 2012, which was its first full year operating under chapter 11 bankruptcy protection.

The carrier did post other gains, despite its headline loss. American was the only mainline carrier that reduced operating expenses in 2012, which fell 1.1% to $24.7 billion. PRASM was up 5.8% to 13.03 cents while traffic increased 0.2% on a 1% decrease in capacity. CASM excluding fuel was up 1.5% for the year.

"Throughout 2012, we have executed on all aspects of our business plan - streamlining our organisational structure, increasing unit revenues, reducing unit costs, and restructuring our balance sheet," said Bella Goren, chief financial officer of American parent AMR, in January.

American suffered from a series of mechanical and labour issues that impacted its operational reliability in the third and fourth quarters. It temporarily grounded 48 of its Boeing 757-200s after rows of seats came loose on two separate aircraft while inflight in September. In addition, a dispute with its pilots caused a significant uptick in delays and cancellations in September and October that resulted in the airline reducing its schedule by 1% to 2% through early November.

Beyond the mainline carriers, results were largely positive in 2012. Alaska Airlines reported a $316 million net profit excluding special items ($339 million with items), Hawaiian Airlines a $53.2 million GAAP net profit, JetBlue Airways $128 million in net income and Allegiant Air $78.6 million. Frontier Airlines, Spirit Airlines and Virgin America have yet to report their full year earnings.

"2012 was a good year," said Brad Tilden, president and chief executive of Alaska, in January.