Gaining Altitude : Airlines Post Strong Third Quarter, but Analysts See More Bumps Ahead
Beginning to pull out of its steep dive, the nation’s major airlines made an impressive amount of money in the third quarter and are positioned to post the first annual industrywide profit in five years.
Those gains were underscored Thursday as UAL Corp., the parent company of United Airlines, and Delta Air Lines both reported earnings gains of nearly 20% in the third quarter. Over the last two weeks, American, Northwest, Alaska, Continental and Southwest also have recorded significant profit gains--in some cases quarterly records.
The improved profits came from painful cost cutting and layoffs, lower fuel costs and a healthy nationwide economy. “They are mostly exceeding expectations,” Merrill Lynch analyst Candace E. Browning said of the carriers’ results. “More people are flying.”
The stocks of UAL and Delta both closed sharply higher Wednesday. UAL’s stock jumped $3.75 to $89 a share; Delta rose $2.75 to close at $49.50.
If the trend continues, the airline industry could finish the year with about $1 billion in profits--a reversal from the $12.7 billion in losses it has suffered since its most recent profitable year, 1989.
Yet few in the industry are celebrating. A single strong quarter for the industry--or even a $1-billion collective profit for the year--hardly makes up for the four years that drove venerable carriers such as Pan American Airways and Eastern Airlines out of business.
“The profit that the industry posts this year is not an indication that it is all sunny skies,” said Christopher Chiames of the industry’s Air Transport Assn.
Moreover, the spate of good fortune comes at an awkward time for airlines such as American and Delta, which are trying to wrest concessions on wages and work rules from skeptical unions.
“We must do better and become consistently profitable, and the entire company is committed to doing that,” Delta Chairman Ronald W. Allen said Thursday.
Delta reported third-quarter net income of $186 million, but that included $114 million from a one-time accounting charge. Excluding that, Delta’s earnings from July through September were $72 million, up from $61 million a year earlier.
Delta is due to start negotiating with its pilots union in a month. It is hoping for a contract that will allow it to meet its goal of saving $2 billion on costs by 1997.
Likewise, American Airlines chief Robert L. Crandall has called for $750 million worth of work-rule changes that would require employees to work longer hours for the same pay. The company last week announced record quarterly earnings of $205 million, nearly double those of a year earlier.
“In light of our earnings, some may ask if the company still needs to change,” Crandall, chairman of AMR Corp., American’s parent, said last week. “The answer is that it clearly does.”
UAL, which went through an employee buyout in July in return for wage and work-rule concessions for United Airlines, on Thursday reported earnings of $178 million, up from $149 million a year ago.
Airline executives view cost reduction as crucial to their long-term survival. USAir Group, which spends nearly twice as much to move passengers as does low-fare Southwest Airlines, cited high operating costs as the primary reason it was one of the few carriers that lost money in the third quarter.
Despite the industry’s generally heady profits, analysts and experts say debilitating fare wars or rising fuel prices could outweigh the positive effects of stepped-up traffic and reduced expenses.
Salomon Bros. analyst Julius Maldutis predicted that the impressive earnings “are going to stiffen the resolve of unions,” but he said it may be weakened by more moderate earnings in the fourth-quarter and for the year.
Besides labor problems, airlines also face the prospect of both fuel costs and taxes rising in 1995, according to Aviation Forecasting & Economics, an Arlington, Va.-based consulting firm.
And competition among carriers still runs unabated, holding down ticket prices even with the increase in passenger traffic. Low-fare upstarts are forcing the more expensive long-haul carriers to moderate their prices, said Aviation Forecasting’s president, Michael K. Lowry. And new competitors are in the wings.
“For your higher-cost, full-service carriers, this is bad news,” he said.
“You are going to see diminished profitability.”
Wing and a Profit
The nation’s airlines are coming back in 1994 after four years of heavy losses. They are posting impressive third-quarter earnings and are on track to post their first annual profit since 1989. The profits are a result of cost cutting and layoffs, lower fuel costs and a better economy.
AIRLINE PROFITS
Total net profit or loss for U.S. scheduled airlines, in billions:
1994: $1.0 (Estimate)
AIRLINE COSTS
Though the older, established airlines have cut their costs, they still operate far more expensively than newer upstarts such as Southwest and Reno Air. Cost per available seat mile, * in cents:
Delta: 11.62
US Air: 11.46
American: 11.21
United: 11.07
Northwest: 10.21
America West: 7.92
Reno: 7.19
Southwest: 6.07
* An industry benchmark that measures the cost of moving a single seat a single mile Source: Air Transport Assn.; Aviation Forecasting & Economics
