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Aviation History
2002
2002 - 3160.PDF
BUSINESS ANALYSIS US AIRLINE RESULTS SCOTT HAMILTON / SEATTLE Poor figures dash recovery hopes Third quarter results highlight stark differences between struggling major airlines and flourishing low-cost operations Just six or seven months ago, the US airline industry hoped that it would see some profits in 2003, with full recovery in 2004. Now, after a wave of gloomy third-quar ter results, no-one is talking of recovery before 2005. As the US airlines struggle with a continuing weak economy, and fears of a war with Iraq, a new round of terrorist activity in Asia and the Middle East casts further doubts on the financial future of commercial aviation. Alaska Airlines and Southwest Airlines are the only major carriers to report a profit since the earnings season opened on 15 October. Consolidated net profit for the Alaska Air Group was S10.6 mil lion, compared with $75 million for Southwest. Low-cost carrier AirTran Airways reported a net profit of $1.2 million for the quar ter compared with a net loss of $10.6 million for the 2001 period. Fellow low-cost operator JetBlue Airways is also expected to report a profit, estimated to be about $12 million, and low-cost Frontier Airlines - battered by near-bankrupt United Airlines at their co-hubs in Denver, Colorado - is forecast to report a loss in the $3 million range. But the second-largest US carrier, United Airlines, rocked the market with a worse-than-predicted net loss of $889 million after charges, an operating loss of $646 million and revenues of $3.74 billion, down 9%. Regional carrier Atlantic Coast Airlines, a codesharing partner with United and Delta Air Lines, saw its net profit plunge 33% to $8.5 million on revenues, up 31% for the quarter. Collectively, the US airlines reported results that were about $250 million worse than forecast by one analyst, entirely due to the per formance at United. Without United, the airlines reporting by 18 October were about $100 million above forecast. The fourth quarter is largely expected to be worse, based on seasonally lower traffic during the period, although comparisons to 2001 will give a false impression of rapid recovery - the fourth quar ter of 2001 was immediately after the 11 September attacks. Debate continues over whether the airlines are in a worse shape compared with the Gulf crisis 11 years ago. Today, of the major carri ers only US Airways is in Chapter 11, while United teeters on the brink. Eleven years ago, America West, Continental, Eastern, Pan Am and TWA, representing 40% of the US industry's capacity, were in bankruptcy protection and North west avoided it by a last-minute deal with its labour unions. The airlines have billions of dol lars in cash available and billions of dollars of unencumbered assets that, at least in theory, can be used as loan security. But the capital markets are open only selectively and at rates higher than in the recent past. The problem for carri ers such as American and Delta, while still able to tap the capital markets, is that today's debt bur den becomes tomorrow's interest payment - the problem facing United with $900 million in due bills in November and December. Business passenger traffic, the backbone of airline profits, contin ues to fall short while the network US AIRLINE THIRD QUARTER RESULTS American Airlines United Airlines Delta Air Lines Northwest Airlines Continental Airlines Southwest Airlines Alaska Airlines Revenues $m change % 4,494 3,737 3,420 2,564 2,178 1,391 620 America West Airlines 520 ExpressJet Airlines AirTran Airways Midwest Express 270 183 104 -6.7 -9 0 -0.7 -3 +4.2 +5.4 +5.9 +7.8 +22 -5 Op profit/ loss $m -1,321 -646 -385 8 46 91 23 -40 37 7.6 -13.4 Net profit/ loss Sm -924 -889 -326 -46 -37 75 11 -31 22 1.2 -8.6 Cash in hand $m 1,200 2,000 1,660 2,500 1,300 1,940 663 422 147 117 37 carriers struggle with costs. But George Hamlin, senior vice-presi dent of Global Aviation Associates, notes that it is not just Southwest that is doing better than the net work carriers and making money. "Southwest is making money, but it has the cost structure [to do so]," Hamlin says. "The regionals continue to do fairly well. The rea son they are making money or doing better is simple: there is a modest component of high-yield business travel still out there." Hamlin says regionals like Comair were making large profit margins. "You could take away quite a bit and still have a 10% margin." Busi ness travellers are also gravitating to low-fare airlines for their prices and lack of ticketing restrictions. Excess capacity is still a problem. Hamlin believes the regionals do not suffer from this, while the USA's major airlines have excess capacity "north of 10%. A carrier the size of Continental could go away and not be missed." Putting pressure on the network carriers are the low-cost airlines, The USA's major carriers have more than 10% excess capacity as travellers flock to low-cost alternatives which now account for about 24% of the US market. Southwest will continue to grow in the single-digit range and, by 2012, is forecast to be larger domestically than American. AirTran forecasts a 25% growth rate next year. Newcomer JetBlue is aggressively adding air craft and routes. Alaska will grow by 15% in the fourth quarter, slower than previously forecast but still in sharp contrast to American, Continental Airlines, Delta, Northwest and United, all of which are shrinking at double-digit rates. Cost control remains a problem for all airlines. A Unisys study con cludes that the network carriers need to trim $18 billion in costs between them to compete effec tively with Southwest. But Hamlin notes that cutting infrastructure costs for the large carriers will be especially difficult. Then there is the wild card of the possible war with Iraq. Standard & Poor's concludes that, for now, airlines have adequate cash reserves, but the rating agency worries that a war will quickly devour that. S&P seems most con cerned about Continental, despite a better performance than its peers. S&P notes that Continental fore casts only $1 billion in cash at year- end, it has no credit lines and its fleet is fully encumbered. "This should be sufficient if the current situation does not worsen, but could prove inadequate if the US military action against Iraq triggers a material decline in airline indus try traffic," says S&P. 28 29 OCTOBER - 4 NOVEMBER 2002 FLIGHT INTERNATIONAL www.flightinternational.com
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