The Wall Street Journal-20080116-Most Airlines to Post Quarterly Losses- Industry Is Expecting Another Annual Profit- Tough Times Lie Ahead
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Most Airlines to Post Quarterly Losses; Industry Is Expecting Another Annual Profit; Tough Times Lie Ahead
Battered by winter storms, high fuel prices, and fears of a looming recession, U.S. airlines are expected to report a collective loss for the fourth quarter, starting with American Airlines' parent AMR Corp. today.
But the industry is still on track to record 2007 as its second consecutive year of profitability, thanks to years of painful cost- cutting and restructuring that have made U.S. carriers' operations more efficient.
Airlines are keeping capacity in check, which is helping them increase fares and keep planes filled. Just last week, discounter Southwest Airlines Co. cut 17 round-trip flights from its spring schedule and shifted 40 others to more-lucrative routes. Other airlines have similarly slowed their growth and shifted poor- performing flights to more-promising markets. An added focus on overseas expansion has helped buoy many carriers, since profit margins there tend to be higher.
Still, the industry has tougher times ahead as it struggles to sustain profits in the face of staggeringly high jet-fuel bills and weakening demand for air travel.
"We're worried about oil, and we're worried about consumer spending," said Standard & Poor's airline analyst Jim Corridore, who called fuel prices "alarming."
Indeed, the annual fuel bill for U.S. passenger and cargo airlines is approaching $40 billion this year, more than double the $15.2 billion expense in 2003, according to the Air Transport Association, an industry trade group. Those surging fuel costs are offsetting airlines' labor-restructuring efforts, and jet-fuel prices have outpaced domestic fares over the past several years, the association's chief economist, John Heimlich, said in a recent report. Through much of last year, for example, domestic fares were down 9% from 2000, while jet fuel more than doubled in price, according to the report.
Those higher fuel prices dealt a blow to airlines in the latest quarter, as did disruptions in operations from winter storms that were more severe than in the year-earlier period. The industry also started showing signs of weaker-than-expected growth in unit revenue, which is the revenue airlines collect for each seat flown one mile. Analysts suspect that this is a sign of falling demand.
Of the 10 largest U.S. airlines, eight, including American's AMR parent, are expected to report net losses for the fourth quarter, according to analysts surveyed by Thomson Financial. Of those eight, AMR, US Airways Group Inc. and JetBlue Airways Corp. are expected to swing to a loss from year-earlier profits. United's UAL Corp. parent and Alaska Air Group Inc. are expected to widen their losses of a year earlier. Meanwhile, Delta Air Lines Inc. and Northwest Airlines Corp. -- the last two big carriers to emerge from bankruptcy-court protection -- are expected to show improvement, narrowing their year- earlier losses, as is AirTran Holdings Inc.
Only Continental Airlines Inc. and Southwest are expected to avoid losses in the quarter. Analysts expect Continental to break even as it benefits from its higher proportion of lucrative business travelers and a more aggressive push overseas. Southwest is expected to report a profit, although it is coping with stiffer competition from other airlines imitating its low-cost, low-fare model.
The tougher conditions are already accelerating talk of industry consolidation, with Delta last week seeking permission from its board to explore merger talks with Northwest and United. Delta's hope is to enter a merger deal with one of them, according to people familiar with the matter.
Mergers could help airlines cope better with high oil prices and falling demand without having to file for bankruptcy-court protection. Carriers are also facing increased pressure from labor unions, which are demanding higher pay as they negotiate contracts this year.
One merger deal could lead quickly to others, reshaping the industry in coming years. Already, investor hopes of consolidation have driven a recent rally in airline stocks after prices slumped to 52-week lows.
In the meantime, analysts expect airlines to further curb growth in the coming months. Credit Suisse airline analyst Daniel McKenzie expects cautious forecasts from airlines on demand for travel in the current quarter, when he estimates crude-oil prices will average about $90 a barrel.
Continental is scheduled to report results tomorrow, UAL Tuesday, Southwest Jan. 23, US Airways and Alaska Air Jan. 24, and JetBlue and AirTran Jan. 29. Northwest is expected to report results Feb. 4.
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Corrections & Amplifications
U.S. airlines with $20 million or more in annual operating revenue together earned $7.68 billion in the first nine months of 2007. A graphic accompanying an article Wednesday about expected earnings for U.S. airlines incorrectly labeled airlines' net income/loss in recent years in millions of dollars instead of billions. In addition, Northwest Airlines Corp. is scheduled to report fourth-quarter results Jan. 29. The article incorrectly gave the date as Feb. 4.
(WSJ Jan. 18, 2008)
