Given heavy losses from Trans World Airlines and US Airways, the latest round of third quarter results from the US majors could have played much worse on Wall Street than it seems to have done. Most aviation analysts were keen to point to some bright spots on the industry's horizon despite the setbacks.

Yields remain a worry. Salomon Smith Barney's Brian Harris, notes that domestic revenue per seat continued to be weak in the third quarter, while the North Atlantic was down heavily. However, he notes that seat yields to Latin American were "stable to slightly positive", and "nicely positive" on the transpacific. In the fourth quarter, he anticipates that domestic revenue will "not decay", while international revenue will be "flattish" due to the battle on the Atlantic.

Paine Webber's Sam Buttrick also expects that domestic seat yields will "stabilise in the fourth quarter, and possibly improve". Susan Donofrio, with Deutsche Bank Alex Brown, suggests the main reason for the current environment of weak revenue growth is a simple case of overcapacity." Looking ahead, many managements have strongly hinted that they are revisiting their capacity plans for the year 2000 with a downward bias. So we continue to think that our forecast of 5% system capacity growth for next year is a worse-case scenario," she says. Donofrio adds a "more realistic" capacity growth figure for the US industry next year will be in the 3.5-4% range.

On the cost front, the industry is still battling with rising fuel prices, which ran at ó57 per gallon over the latest quarter. Donofrio expects the price to hit ó61 in the fourth quarter, rising to ó67 early next year, before gradually falling back.

Some of those costs could be offsight by a brighter picture on agency commissions. Those are going down again, thanks to a domestic commission cut by United Airlines that was subsequently matched by other carriers. Harris expects these cuts to save carriers as much as $750 million annually, helping them gain back roughly half the cost of more expensive jet fuel.

Buttrick predicts that base commissions may go down further. "From the airlines' perspective, they want to decrease the amount they pay for inefficient paper-pushing, and increase the amount they pay for demonstrable share shift. Base commissions compensate for the former, overrides for the latter. The base commission may go to zero, but total commissions certainly won't," he says. But Buttrick expects labour costs to rise. "Labour has inherent leverage and they've got good contractual protection. They have management in a corner," he says.

Several analysts remain bullish about Southwest Airlines after a solid set of results. Donofrio, who predicts the low-cost carrier is likely to open up two more east coast cities next year, says: "This means that their continued success at penetrating the high-fare east coast market should be a slam-dunk." Southwest might well go into a new city in the southeastern USA, as well as another city in the New York area, she believes.

Harris warns that the "biggest issue" ahead for the industry is the decay in business demand that started in October 1998. "Business travellers are more proactive about getting lower fares, planning ahead, making weird connections, going on Southwest. It's one of the hardest things to understand," he warns. He also predicts that the Internet will continue to grow rapidly as a means of distribution, with carriers' revenues from this channel increasing 200% year over year. He says 5% of most US carriers' revenues are already generated on-line, from their own and other travel web sites, with Southwest "way ahead" of the industry in this regard with about 15% of its revenues from the Internet.

Source: Airline Business