US majors are riding the crest of increasing and often record profits but face a worrisome disparity between domestic and international yields. Most US majors have turned to domestic fare increases, but worry that a slowing US economy may dampen demand. Meanwhile, American Airlines warns transatlantic competition will get tougher.

At Continental Airlines unit revenues rose nearly 10% in the third quarter compared to the same period last year on international routes. But domestic unit revenue was up just 2.5% in the quarter. Continental chief executive Larry Kellner blames increased US low-cost carrier competition and notes Delta's fast-expanding transatlantic operation from New York JFK (see p11) has failed to crimp Continental's international performance at its rival Newark hub.

"We expect the domestic market environment, although bolstered by strong summer demand, to continue to experience soft yields," he says.

Reflecting the overall soft US revenue trend, Southwest Airlines chief executive Gary Kelly says: "Our revenues are at record levels but they're still not accelerating fast enough to meet these cost challengesWithout a doubt we need stronger revenue performance to deal with rising costs."

At Delta, chief executive Richard Anderson told analysts the airline turned over $360 million in pre-tax profits in the third quarter and generated its highest quarterly revenues ever in large part because of its transatlantic expansion. Delta chief financial offer Ed Bastian says Delta's domestic unit revenues were up 6% but international unit revenue was up 9%. "The international routes that we added this year outperformed the first-year performance of routes that we added in the prior year," Bastian says.

American's international unit revenues improved in large part because it dropped some underperforming routes, including from San Jose in California to Tokyo and from Dallas to Osaka. As a result, American's Pacific unit revenues grew by 21%, but in other regions actually lagged domestic unit revenues.

But American sounded a warning, noting that transatlantic competition was increasing and would intensify even more once Open Skies comes into effect next March and new rivals such as the just-announced Air France-Delta joint venture begin flying.

And the traditional cash cow market of London Heathrow may be harder to squeeze profits out of, warns American chief executive Gerard Arpey. "Anyone who thinks that (London) is going to be an easy market or panacea for terrific profits is not mindful of what's been going on in the London market for many months now."

"We expect the domestic market environment to continue to experience soft yields"

Larry Kellner

Chief executive, Continental

Source: Airline Business