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Aviation History
1993
1993 - 1964.PDF
BUSINESS ANALYSIS RECOVERY IN THE AIR Will the US airline industry look back on the start of 1993 as the point when its fortunes changed? Second-quarter results have provided analysts with a glimmer of optimism. While it remains danger ous to predict recovery in the US airline market, ana lysts scanning some unexpect edly good second-quarter figures are beginning to scent that the gloom is lifting. By most measures, the indus try's performance is still weak. At best, the US airlines can only look for break-even this year, with little prospect of a genuine return to profitability before late 1994. The carriers themselves are anxious not to overstress the good news, with airline presi dents pointing out that a mod est second-quarter profit is no excuse to abandon swingeing programmes of cost-cutting and capacity restraint. Bob Crandall, of American Airlines, led with a caution that "...the net margin is wholly inadequate" and that, despite cost-cutting measures "...reve nues and costs remain clearly out of balance". Stephen Wolf, at United Air lines, warned of the need for "substantial further reduction in costs" if the airline is to reach "long-term viability in the domestic market". That four of the top five airlines each managed to show a quarterly net profit for the first time in more than a year is nevertheless an achievement. Only NWA, parent of North west Airlines, reported further heavy losses. In its defence, the airline pleads that the loss in cludes a charge of nearly $100 million for restructuring of its stressed finances and penalties for cancelled aircraft orders. NWA president John Dasburg points out that the airline reported a modest oper ating profit for the second quarter, representing a $150 million turn-around over the June quarter of 1992. He ar gues that the airline's new labour agreement will have an immediate impact on costs. Beyond the majors, America West revealed surprisingly pos itive results — helped by the "systematic [fleet] downsizing" and a tighter route network. The airline, once tipped as the least likely to survive, is confident that it can follow Continental and Trans World Airlines out of Chapter 11 bankruptcy. An optimistic America West management says that the its recent per formance is allowing it to make "meaningful strides toward fil ing a plan of re-organisation by the end of the year". The fact that Wall Street was largely unprepared for the in dustry's second-quarter profits is itself interesting. One analyst suggests that financial markets may have overdone the gloom, paying too much attention to the conditions in which the airlines are operating and giv ing carriers too little credit for the way they have begun to tackle the industry's problems. The second-quarter results add to evidence that the air line's new-found resolve to act on costs, capacity and fares is returning the market to some thing approaching balance. Efforts to rein back on new- capacity growth show in the second-quarter figures. Only American saw seat capacity rise ahead of passenger-traffic growth, although Crandall an nounced the grounding of the first three of 31 McDonnell Douglas DC-lOs, due to be retired by early 1994. Revenues, too, grew faster than traffic as the airlines made universal (and badly needed) gains in yields. American, which led 1992's domestic- fares war, posted an impressive 10.8% gain in yield during the latest June quarter. USAir president Seth Scho- field is among those who ex pect that the positive trends will continue over the third quarter, helped by a further easing in over-capacity. Such confidence is in stark contrast to the position a year ago, as carriers fought to fill capacity regardless of cost in the bruising US-summer fares war. The result was an artifi cial, and ultimately profitless, growth in traffic. The combination of both ris ing yields and traffic suggests that the market is iiow experi encing a return of underlying demand, fuelled by an incipient recovery in the US economy. Some believe that the turning point became visible at the start of this year. At the same time, carriers have been gearing down to a depressed market through a concerted attack on costs, in cluding action on pay and pro ductivity. The pay cuts in exchange for equity deals being proposed by labour unions at United, show an interesting possible way forward. Pressure on costs is far from over. Although fare discount ing is not at 1992 levels, when more than 80% of passengers were benefiting from half-price tickets, discounts of around a 30% average are still on offer. Even with a strong third quarter, it will be almost im possible for the industry to end this year in profit, given heavy first-quarter losses. By the end of the year, the fundamentals should at least look better for a recovery in 1994, provided that the indus try continues its good house keeping, though there have been false dawns before, as Wall Street is keenly aware. BY KEVIN O'TOOLE a Top five US airline groups quarterly** profit performance ($m) Group AMR JAL Delta MA JSAir TOTAL Airline American United Delta Northwest USAir Q1 8 -108 -152 -107 -110 -469 1992 Q2 Q3 -183 -54 -91 22 -180 -107 -146 -20 -131 -55 -173 -214 Q4 -200 -224 -126 -89 -254 -893 1993 Q1 Q2 -22 47 -138 22 -134 7 -99 -135 -61 6 -454 -53 ** Taken from unaudited quarterly reports US airline group second-quarter results ($m) Group sales Q2 Net earnings Q2 Group 1993 93/92 1993 1992 AMR 4,212 +17.4% 47 -183 UAL 3,548 +13.0% 22 -91 Delta 3,132 +10.8% 7 -180 NWA 2,095 +7.1% -135 -146 USAir 1,816 +6.8% 6 -131 Southwest 521 +24.9% 42 23 AmWest 325 -2J3% -5J -173 US airline second-quarter performance scheduled passenger services Airline American United Delta Northwest USAir Percentage change against 1992 Q2 Revenues +16.8 +13.4 +10.0 +7.3 +6.7 Capacity Traffic Yield +9.5 +6.9 +10.8 +11.9 +12.0 +1.3 +2.0 +5.0 +5.0 -1.3 +3.8 +3.4 -1.7 -0.8 +7.5 Load factor Load 1993/2 61.5% -1.5pts 67.4% +0.1 pts 62.2% +2.0pts 64.6% +3.4pts 60.4% +0.5pts FLIGHT INTERNATIONAL II - 17 August, 1993 23
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