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US results: Climbing off the bottom

US carriers are relieved to be firmly entrenched in a first quarter that appears to show a rebound is underway. But make no mistake; caution is the buzzword emerging from both low-cost and major airline management teams.

The relief to be rid of 2009 is probably felt strongest by major carriers who all posted losses for the year. But Continental's fourth quarter net profit of $85 million perhaps offers a glimpse the sector could be on the mend, while the US majors take heart from strict cost control measures and successful liquidity drives completed during the year. Delta chief executive Richard Anderson calls it "one of the most difficult years we faced in the airline industry".

The contrast of low-fare carriers thriving in the weak environment continued in the fourth quarter and full year as they continued to be shielded from the drastic decline in premium traffic. AirTran, JetBlue and Southwest all posted profits in 2009; AirTran and JetBlue remaining profitable in each quarter.

JetBlue chief executive Dave Barger says it achieved free cash flow in 2009 for the first time amid tightening credit markets, weak revenues and fuel price volatility. Southwest turned a similar performance, especially during the fourth quarter. Carrier chief executive Gary Kelly says it turned its best unit revenue performance of the year during the quarter. "That means we set an all-time record in terms of quarterly unit revenue in the fourth quarter of a recession," he says.

Airlines are emerging from the rubble of 2009 with a tempered optimism that a recovery is underway. All the major carriers highlight encouraging signs that a slow rebound in business traffic is starting. "We've seen clear evidence that the revenue environment is improving and those trends are continuing into the first quarter," says Delta president Ed Bastian, adding January corporate bookings are 10% up.

Cautious On Yields

Despite the improvement in corporate booking trends, no carrier is willing to predict when yields will reach pre-recession levels. "Corporate booking trends are positive, and we are seeing a pickup of bookings inside of 14 days, but even so yields remain soft," observes Continental chief marketing officer Jim Compton. "We continue to believe the recovery will be long and slow, but recent trends are encouraging."

Much of the rebound is seen in international markets, notably the transatlantic, whose performance was extremely weak for most of 2009. Bastian says Delta expects to post double digit yields in the transatlantic during the first quarter. Citing transatlantic as "emblematic" of the international environment, chief financial officer at American, Thomas Horton says unit revenues in those markets should continue to improve due to reduced capacity, improvement in demand, particularly in the premium cabins, and strides in the pricing environment.

Caution also seems to underlie the continued capacity discipline seen since late 2008. The major carriers are especially adhering to tight capacity management, with United supplying conservative estimates of consolidated capacity in a range of decreasing 0.5% to rising 0.5% in 2010. American expects its 2010 mainline capacity to be 1% higher, but comparison with 2007 shows domestic capacity roughly 15% lower and international 1% down.

By contrast AirTran and JetBlue in 2010 plan capacity growth in the 3%-4% and 5%-7% range, respectively. Some of AirTran's growth is driven by the delivery of two Boeing 737s in September 2009 whose sale failed to materialise after the buyer encountered problems financing the aircraft.JetBlue says the effects of new cities introduced in 2009, particularly routes to the Caribbean, are driving much of its growth. But Barger stresses it comes after it has been trimming its growth significantly. "I am of the opinion that the industry has too much capacity," he says, but adds some airlines "including JetBlue have earned the right to grow".

Step Change?

Such capacity discipline begs the question whether the controlled growth is a step change for the industry? United president John Tague says the financial community has every right to expect the industry to eliminate "the component of cyclicality that is clearly self-inducedwe better, as a business, start planning for what our decisions reflect in the bottom of the cycle." Continental chief executive Jeff Smisek adds: "We have seen the benefits from and understand the importance of capacity disciplineaccordingly, we've adjusted downwards our anticipated 2010 capacity from earlier estimates."

Capacity discipline has fostered some positive sentiments among analysts. "Earnings season served to strengthen our view that the fundamental outlook for airlines over the next several years is robust," says Gary Chase of Barclays Capital. "Expectations have risen, but we still believe the ramifications of flattish capacity and a recovering economy will create a better than expected multi-year outlook." But, AirTran chief executive Bob Fornaro acknowledges, one good year does not translate into longevity. "We had a good year in 2009. We need at least another good year in 2010 to really put the company back on track to where it was. So it's going to take two good years to erase the performance we had in 2008. So right now it's financial success first for us."

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