Investors Await Profits; Airlines See Some Hope

Investors will be poring over the rush of earnings reports this week from titans such as chip supplier Intel Corp. and computer maker IBM Corp.

Also this week, the nation’s airlines will begin reporting third-quarter earnings, and two themes are expected to dominate their stories: loss and hope.

On the one hand, the airline industry is expected to report a collective deficit as high as $400 million, putting it on pace to lose nearly $6 billion in 2003. But, analysts say, even a shortfall of that size would be much smaller than a year earlier, earning the industry the right to feel at least slightly optimistic.

The industry’s financial situation these days is “pretty good compared to the last couple of years,” UBS airline analyst Samuel Buttrick said.

Excluding the effects of one-time items, such as federal reimbursements for security costs, analysts believe the industry will report its first operating profit since the fourth quarter of 2000.

And the perennially profitable Southwest Airlines Co. is expected to be joined by Continental Airlines Inc. as the only other carrier that earned a net profit in the July-to-September period.

Many airline stocks remain below pre-Sept. 11 levels, but they have nonetheless soared in the last year due to confidence that the U.S. economy is recovering and that industrywide restructuring will eventually pay off.

Airlines no doubt got an extra lift this summer from leisure travelers who had postponed trips in the spring due to the war in Iraq, analysts said. With demand high, carriers were able to charge more.

Merrill Lynch airline analyst Michael Linenberg said the gradual improvement reflects better cost control. Blaylock & Partners airline analyst Ray Neidl said reducing extra capacity has begun to pay off. With smaller planes and less-frequent flights, carriers are using their fleets more efficiently, he said.

Still, analysts are quick to point out that major carriers face several long-term obstacles, ranging from the rapid ascendance of low-cost rivals to high levels of debt.

The persistent stinginess of business travelers is also a problem, since this group of customers tends to purchase the highest-priced tickets available. Although leisure travel demand was strong this summer, it has tapered off enough this fall that carriers have responded by lowering fares.

Reducing labor expenses still remains a priority. Delta Air Lines Inc. is making changes to flight attendants’ work rules in an effort to save $40 million a year. United Airlines Inc., which is operating under bankruptcy protection, is seeking government approval to postpone payments to employee pension plans, a move already made by Northwest Airlines Inc.

“While third-quarter results will be the best the industry has seen since Sept. 11, extreme fundamental challenges remain,” Lehman Bros. airline analyst Gary Chase said.

With losses for 2001 through 2003 likely to total about $25 billion, factors underlying major carriers’ woes are well-known: a droopy global economy, terrorism, wars in Afghanistan and Iraq, and intense competition.

What is uncertain is whether airlines will remain disciplined about keeping costs down as revenues grow, several analysts said, cautioning carriers against rebuilding capacity too quickly.

The other serious concern is increased competition from low-cost rivals such as Southwest Airlines, JetBlue Airways Corp. and AirTran Airways Inc., all of which have been profitable throughout the year. These carriers, along with Internet travel companies, have helped fuel the demand for cheap fares among leisure and business travelers alike.

Lehman Bros.’ Chase speculated that the strong demand for leisure fares that helped prop up prices this summer may have been caused in part by the growing number of corporate travelers who book in advance and avoid buying the most expensive, last-minute fares.

“If those travelers are buying leisure fares ... it will be a long time before we see a lot of light at the end of the tunnel,” Chase said.

Delta reports earnings Tuesday, followed by Northwest and Continental on Thursday. American Airlines posts results the following week.