Struggling Airlines Find No Summer Lift : Earnings: Investors retreat as American predicts lower second-quarter profit. Travelers may see aggressive fare cuts.
The nation’s airlines, which had hoped that their nearly 3-year-old slump was ending, appear to be stuck in turbulent skies just as the lucrative summer travel season begins.
Blaming slower than expected growth in passenger traffic, American Airlines--the nation’s largest--said Thursday that its second-quarter profit will be significantly below Wall Street’s expectations. USAir one day earlier also disappointed investors with bleaker expectations about its quarterly performance.
American’s announcement lowered airline stock prices for a second straight day and raised expectations of more aggressive fare cutting this summer. “They will have to do something to stimulate a dormant market,” said Thomas Nulty, president of Santa Ana-based Associated Travel Management.
A year ago, airlines slashed discount fares 50%, allowing consumers to travel on coast-to-coast round trips for $200. But most analysts doubt fares will be cut as deeply this summer.
On Wall Street, the unwelcome news sent American shares down $4.25 to close at $61.50 on the New York Stock Exchange. Other airlines lost ground too: United Airlines stock fell $5.50 to $121.50 and Delta Air Lines closed at $48.50, down $1.37.
American said passenger traffic in May, though better than last year, was still below expectations--a trend the airline expects to continue. In addition, the Dallas-based carrier said the performance of its international routes--particularly across the Atlantic--continued to be weak.
“The economy isn’t moving as quickly as everybody would like,” said American spokeswoman Andrea Rader.
American’s traffic ran only one percentage point below expectations in May. However, even that small difference could mean reduced revenue of about $150 million a year for the giant carrier, said John Stodden, a transportation analyst for Duff & Phelps/MCM, a Chicago-based investment research firm.
That loss in revenue could negate much of the cost-cutting efforts American and other carriers have undertaken to restore profitability, Stodden said.
Stodden, Rader and others said that many on Wall Street have been overly optimistic about the airline industry’s performance this year. American had been expected to generate profit of $75 million during the current second quarter, one group of analysts had predicted.
“I think there have been a lot of rosy forecasts floating around,” said Harold Sirkin, a transportation specialist at the Boston Consulting Group. “But the fundamentals have not changed a bit.”
The domestic airline industry lost a record $4 billion last year, but is expected to cut its losses significantly and might even break even this year, despite the recent setbacks, according to some forecasts.
Besides weak economic growth, business travelers have been hit with fare hikes while many leisure travelers are waiting for a repeat of last year’s massive fare war, say airline industry analysts.
“People are saying, ‘I think I’ll hold off until the sale comes,’ ” said Dianne LaPorte, vice president of operations at World Travel Bureau in Santa Ana.
