The major US airline groups posted their first quarterly loss for over five years. Jane Levere reports on the outlook from Wall Street.

After all the warnings it came as little surprise that the first quarter spelled serious trouble for the major US carriers. They collectively posted the first quarterly net loss since emerging from the last recession over five years ago. And Wall Street analysts detect little relief in sight on the horizon.

Stripping out the largest of the special gains and accounting changes which can obscure the results, the majors showed an underlying net loss of some $900 million. That is not only the first outright quarterly loss since the end of 1994, but the largest loss on record since the depths of the recession in 1992.

Analyst concerns have centred on the revenue growth rate which was below 3% for the quarter. Sam Buttrick, airline analyst for UBS Warburg, notes that excluding Southwest Airlines, revenues actually fell 4.6% in the month of March. He finds that decline particularly ominous, noting that it represents the largest monthly decline since the recession of the early 1990s. Against this backdrop, Buttrick believes the United/US Airways deal looks "less probable, with passage of time", adding that it is "crumbling under its own complexity" and has a "limited base of political support". Furthermore, additional conditions required by the Department of Justice(DoJ), such as shuttle divestiture may push United over its limit. With termination date at the start of August, he predicts that United "substantially modifies its purchase price" by as much as a third or "more likely walks."

Brian Harris, analyst at Salomon Smith Barney, also warns that a weak economy is "finally catching up to airline revenues", while costs continue to rise. Of the ten majors - soon to become nine as TWAis absorbed into AMR - only two stayed in the black. Continental was just above breakeven while Southwest posted another quarter of robust profits.

Overall, passenger yields were largely unchanged with a small decline on domestic service offsetting a rise on international. However, seat costs grew by around 8%, fuelled by an aggressive hike in the labour bill of some 15%, which represented a penalty of over $1 billion. Another $500 million was added by fuel. Buttrick predicts that domestic yield trends should stabilise in the June quarter, but that international yield - which represents 30% of revenue - is "likely to deteriorate further" thereby dampening system results. Harris too is cautious, detecting signs of "revenue stability, albeit at low levels, going forward".

Michael Linenberg, analyst for Merrill Lynch, adds that seat costs, even excluding fuel were up by 6.8% and "easily outpacing unit revenue growth". He welcomes the fact that the figures finally show some "modest"cuts to capacity.

All of the analysts note the warning noises coming out of airline boardrooms, especially regarding the outlook for business travel. Buttrick believes that revenues could deteriorate faster in this current downturn as corporations cut back deeper and harder than in the past and use new technology to substitute for travel. While the industy is "managing capacity prudently", it is more affected by demand cycles as dependence on business revenue grows. "Supply isn't the problem; demand is," he adds. Revenues from leisure travel have slowed too, although traffic levels continue to be bolstered by deep discounting. "While the consumer hasn't rolled over, that doesn't mean he/she isn't leaning a bit," he says.

Buttrick is now predicting soft revenues through the current quarter but with a moderate lift in the second half of the year. He projects a 60%fall in operating profits for the June quarter (against a previous estimate of 40%) and net profits to be down 75% (compared with 50%). "If current revenue trends simply persist, with no further deterioration, the airline industry will lose money this year," he predicts.

Harris projects the industry will post an operating profit of $1.4 billion in the current second quarter, down from the $3 billion posted a year ago when yields were still booming.The forecast is for a 2.6% fall in seat yields, against a rise of 4.2% in costs and 3.2% in capacity. The cause Harris cites is that business travellers will be "financially motivated to behave more like leisure passengers", while discounting continues in leisure markets.

Source: Airline Business