Airlines’ Peak Season May Be Over
The U.S. airline industry, which was flying through optimum market conditions only a few months ago, is now engulfed in problems that are leading some observers to assert that its 4-year-old boom cycle is peaking.
The carriers, notably strike-bound Northwest Airlines, are grappling with labor strife and staring at higher operating costs overall. Vaunted strategic alliances between airlines are unraveling only months after being announced. Airline stocks are tumbling.
And concern is mounting that the U.S. economy--and passenger traffic--could soften in 1999 just as the airlines are planning to take delivery of many new jetliners. That would mean more empty seats, renewed fare wars and lower profits.
The result: “I don’t think [industry conditions will] get much better,” said Thomas Carroll, airline analyst for Duff & Phelps Credit Rating Co. in Chicago.
Airlines will face “very difficult comparisons next year” in terms of posting earnings growth above their strong levels this year, said Edward Starkman, who follows the carriers for the investment firm Warburg Dillon Read in New York.
The industry’s latest trouble spot is America West Airlines, the primary unit of America West Holdings Corp. The Phoenix-based company, citing poor “operational performance” caused by “difficult” contract talks with its mechanics, said Thursday that its third-quarter profit would fall short of Wall Street forecasts.
America West spokeswoman Patty Nowack declined to elaborate. But analyst Brian Harris of Salomon Smith Barney recently said the airline has suffered from employee “work slowdowns causing flight delays and cancellations.”
The airline’s disclosure surprised investors, who punished shares of America West and the other airlines Thursday. America West’s stock fell $5.63 a share to close at $14.13 in New York Stock Exchange composite trading.
But airline stocks, as measured by the American Stock Exchange’s airline index, have been skidding since mid-summer amid growing concern that the industry’s strength is dwindling. The index is down 29% since June 30, more than double the 13% decline in the benchmark Standard & Poor’s 500 index.
Indeed, the stock of UAL Corp., the parent of industry leader United Airlines, now sells for a meager 5.5 times the per-share profit UAL is expected to earn this year.
There are several other problems in the industry. Consider:
* Northwest, the fourth-largest U.S. airline, not only remains grounded by a pilots strike, it also faces difficult contract talks with its five other unions. Meantime, Northwest’s proposed strategic alliance with Continental Airlines is on hold and there is speculation the pact could fall apart if Northwest’s labor situation doesn’t improve soon.
* Northwest and United, the leading U.S. carriers to the Pacific Rim, are still being hurt by the economic woes in Asia, and weakness in Latin America could hamper the results of AMR Corp.’s American Airlines, which is a major carrier to the region.
* AirTran Airlines, formerly known as ValuJet, faces a strike by its flight attendants this Labor Day weekend.
* Delta Air Lines this week scrapped a key part of its proposed alliance with United, code-sharing, whereby the carriers would link schedules and sell tickets on each others’ flights. Delta’s pilots have veto power over the linkup, which they threatened to exercise unless Delta gave them a voting seat on its board. Delta refused.
* Just to the north, Air Canada also has been grounded by a pilots strike, and is preparing to lay off nearly half of its 23,000 workers by Saturday if the walkout doesn’t end.
To be sure, some things are still going well for the airlines. The price of jet fuel--the second biggest expense for airlines after labor--has plunged in recent months to about 43 cents a gallon, and is a key reason the airlines’ earnings remain robust.
In addition, the airlines continue to enjoy strong passenger traffic. On Thursday, for example, both Continental and US Airways said their load factors in August--that is, the percentage of their seats that were actually filled--reached record highs of about 78%.
The strong demand for flying has also enabled the airlines to keep fares high, especially business fares, which has added to their earnings growth.
Also, pilots for Trans World Airlines just ratified a new contract without disrupting that St. Louis-based airline.
Even so, other carriers remain under union pressure to significantly raise workers’ wages as their contracts come due for renewal. “Labor is the big issue,” Carroll said. “Labor feels it helped these companies get competitive, and now it’s trying to extract its pound of flesh.”
Airline workers and their unions did help many carriers survive a brutal recession in the early 1990s, mostly by agreeing to wage cuts and other concessions. Now, with prosperity in the industry, labor expects a substantial payback for its sacrifices.
In light of the industry’s profitability, “there is a pent-up demand for oversized pay increases,” analyst Raymond Neidl of ING Baring Securities said in a recent report.
Yet the companies “can’t give away the shop” because the airline business remains “a super-cyclical industry” that’s facing a possible slowdown next year, Starkman said. Indeed, Northwest has said its fear of a slowing economy is a key reason why it’s keeping a lid on what it offers its pilots.
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Strong Profits, Sinking Stocks
Airline stocks have fallen since spring, with the American Stock Exchange index of 10 major carriers down 35% from its peak. The industry is enjoying its fourth straight year of strong profits, but investors worry that labor strife and fears of an economic slowdown could mean the industry’s boom is cresting.
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INDUSTRY PROFIT
Overall profit for major U.S. airlines, in billions: $5.2 billion
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AMEX AIRLINE INDEX
Monthley closes and lates:
Thursday: 274.14
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Sources: Bloomber News, Air Transport Assn.
