A relatively good performance for some US majors during the third quarter has caused a surge of optimism among analysts, but airline bosses warn that a robust recovery is still some way off.

Just to go by US investor exuberance, the airline recovery is already here. While the reality may take some time to catch up with the market's enthusiasm, early earnings have made a strong showing Ð meeting and beating expectations that were raised as recently as late summer.

Some clear signs of a revenue rebound are emerging at the same time that capacity reductions and other cost-cutting steps take effect. Deutsche Bank analyst Susan Donofrio says: 'Revenue continues to stage a slow yet steady recovery, not only from the traffic side but also from strengthening pricing.'

But the carriers themselves have downplayed their results, signalling to both investors and unions to curb their enthusiasm. Most are still seeking cost cuts as the lean winter comes on, and as fuel costs continue to rise while the low-cost carriers continue to grow. A further warning sign comes from Boeing, which has responded to further cancellations of the 757 by announcing the closure of the production line.

Continental Airlines, eager to downplay its strong showing, put off 757 airliner deliveries, converting six orders for the 757-300 stretch to the 737-800. Although Continental would take five of the 757-300s, Boeing reacted promptly, and within hours of the airline's statement, it said it would shut down its 757 line entirely. It had only 18 orders for the twinjet, 11 from Continental.

Continental's Gordon Bethune, even in posting a $133 million net profit in contrast to a loss of $37 million a year ago, warned that further cost cuts would be needed. He stressed that strong summer traffic, a 7.4% unit revenue increase and the sale of its ExpressJet stock had helped enormously in producing the profit. Blaylock and Partners analyst Ray Neidl comments that he is not sure this message will resonate with labour.

At Northwest Airlines, a significant upside surprise came in the form of a $42 million profit with stronger than expected revenue. Michael Linenberg at Merrill Lynch notes that unit revenue grew by 5.3%, well ahead of his 2.4% forecast. But Northwest, like Continental posting its second consecutive quarterly profit, was boosted by one-time factors such as government security reimbursements, says chief executive Richard Anderson. Having shrunk its Memphis hub and shut a major reservations centre, he has called for more savings. The Mechanics Fraternal Association union promptly responded that the 'airline's cries of poverty' are 'irrational'.

Delta Air Lines halved its net loss to $164 million from the $200-250 million it had projected. The group's operating loss was a mere $81 million, a fraction of the $385 million deficit of a year ago. Revenues were flat at $3.4 billion, but yield rose by 8% as mainline capacity fell by almost 10% year over year. It will also sell off or defer 19 Boeing twinjets.

Like the others, though, Delta took pains to point out how much better the quarter could have been with labour savings. Delta's pilot costs are running about $800 million over what American's would be, Mullin said. But newly elected Air Line Pilots Association officers at Delta responded that rewriting cost cuts into the pilot contract is not yet on the agenda. CSFB's Jim Higgins predicts that Delta's pilots are unlikely to 'make meaningful concessions'.

Not even the chronically profitable Southwest is immune from cost pressures. Although its quarterly net profit of $106 million is a 41% increase over last year, it will pinch tighter, chief financial officer Gary Kelly says.

Southwest announced it would end travel agent commissions, saving $40 million annually. It is the last major to do so. But JP Morgan analyst Jamie Baker cautions that Southwest pilots, set for pay raises under a deal signed in August 2002, could become the highest paid in the industry if Delta and Northwest can bring down their cockpit costs

David Field/Washington

Source: Airline Business