Fare increases continue, unit revenues are rising, capacity remains restrained - all while fuel costs level off. American Airlines posted a third-quarter net profit, and although it was a slim $15 million net it was the first time since 2000 the carrier has had two profitable quarters in a row. Fellow Texas-based carriers Continental and Southwest followed, with Continental earning a better than expected $237 million net profit but Southwest reporting a worse than expected $48 million net profit, an over 70% drop compared to 2005.

American and Continental enjoyed a strong bounce from lower fuel expenses, with American chairman Gerard Arpey saying its fuel bill for the second half of 2006 would be at least $528 million lower than it planned. But Southwest, the best-hedged airline in the USA, saw the drop in fuel prices drive up its accounting costs related to fuel hedges. The airline's operating margin is still more than 11%, compared to 5.5% at Continental, which helps keep it on track to meet management's goal of 15% earnings growth for the year.

Higher average fares and unit revenues helped all three carriers, including low-fare leader Southwest, which has raised its fares nine times in the past two years, notes Jamie Baker, an analyst at JP Morgan. Southwest chief Gary Kelly calls the industry's fare increases "aggressive", which is "just perfect" for letting Southwest push through its own "modest increases", producing some "scorching" unit revenue gains.

But executives from all three airlines as well as analysts warn against any excess optimism, noting the revenue crimp the carriers suffered from the brief terrorist scare in August. The always cautious Arpey says: "The industry is a long way from turning any corners. The industry has lost $50 billion since the year 2000, and taken on billions and billions of dollars of debt. In a very, very strong US and international economy, it's producing very modest pre-tax margins".

Source: Airline Business