'More Normal Year Ahead?'

After enduring perhaps the worst economic downturn of the jet age, US airlines are eager for something that is often elusive in the capricious air transport industry: Normalcy. "Things are looking more normal than in quite some time," AirTran Airways CFO Arne Haak tells ATW, noting that "yield and average prices are very different from what we saw 3-6 months ago," with carriers able to offer a larger "mix of fares" resulting in relative yield improvement.

A brightening economic environment in the second half of the year helped four of the nine US majors to post a 2009 net profit and five to earn positive full-year results on an operating basis, generating cautious optimism that 2010 could produce modest earnings, particularly since the industry has vowed to resist the temptation to add capacity. January and February 2010 unit revenue data from some carriers also suggest a strengthening pricing environment.

For the year, the nine largest US carriers posted a cumulative net loss of $3.43 billion, considerably improved from a net deficit of $25 billion in 2008 when heavy noncash goodwill impairment charges and Delta Air Lines/Northwest Airlines merger costs weighed down the collective bottom line. Operating loss was $532 million, significantly narrowed from a $22.15 billion operating deficit the prior year.

The 2009 losses were not too severe considering that revenue plunged 15.4% year-over-year to $106.74 billion. The carriers cut capacity 6.2%, outpacing a 5.3% traffic decrease. Load factor grew 0.8 point to 80.8%. But the mostly full aircraft hardly compensated for much lower fares, especially in the first half of the year, leading to an 11.1% yield drop to 12.11 cents. Helped by lower fuel costs and reduced special charges compared to 2008, CASM fell 18.3% to 10.83 cents, though CASM ex-fuel rose 5% to 7.74 cents.

The industry is not expecting any quick fixes. Haak says that despite the gradual rise in yield, "nobody is growing [ASMs] more than low-to-mid single digits" and the US industry as a whole will be "down a point or up a point or two" in 2010. Continental Airlines Chairman, President and CEO Jeff Smisek warned that US airlines "likely have a long and slow road to recovery ahead," though he noted, "A long and slow recovery is better than what we had in 2008 and 2009."

The hybrid low-cost, full-service model that secured for AirTran ATW's 2010 Market Leadership Award paid dividends in 2009 as it earned a company record $134.7 million net profit that represented a reversal from its $266.3 million loss in 2008. It also was the best full-year result among US majors. The carrier added more than 30 new routes last year and opened seven new destinations. Haak says LCCs have an advantage in "uncertain" economic periods: "People are very mindful of what they're spending and I think even consumers who may feel less threatened . . . [are] still not going to stick their neck out and spend recklessly."

Original LCC trailblazer Southwest Airlines reported its 37th consecutive full-year profit, a $99 million surplus that represented a 44.4% decline from the $178 million earned in 2008. It remained committed to maintaining "roughly flat" capacity this year despite improving booking trends. Speaking recently to the Wings Club in New York, Chairman, President and CEO Gary Kelly insisted that SWA remains "a growth company." While 2009 was "very, very challenging on multiple fronts," forcing it to shrink capacity on an annual basis for the first time, the LCC is reaping the benefits of a transformation process that began in 2007, he explained.

"We were a no-frills, low-tech, all-domestic, point-to-point operator [but new technology and initiatives to attract business passengers] are enabling us to evolve to something more than that," Kelly said, adding that 2009 saw the airline implement "the largest number of new technology" initiatives of any year in its 38-year history. "The big story of 2008 and 2009" was employing schedule optimization programs that have allowed it to trim unprofitable routes and increase profitable flying, he said, noting that even though capacity shrank 5.1% for full-year 2009, it added four new destinations. The additions included Boston and New York LaGuardia, two airports that SWA previously made a point of avoiding but that now are critical to establishing a complete network, he said.

The other two profitable carriers were Alaska Airlines, whose parent Alaska Air Group posted net income of $121.6 million that compared to a $135.9 million loss in 2008, and JetBlue Airways, which reported $58 million in net income, reversed from an $85 million net loss the previous year and its best performance since 2003. CEO Dave Barger said the profit "demonstrates the benefits of slower growth, which we started in 2006." JetBlue will defer 16 E-190s scheduled for delivery in 2012-16 to 2017-18 and take just four this year and five in 2011.

US Airways ended 2009 with a $205 million net loss that was a significant improvement from the $2.22 billion deficit reported in 2008. Chairman and CEO Doug Parker said that despite the "extremely difficult environment" endured last year, "the actions we have put in place to address the challenges of the past two years--capacity cuts, a la carte revenues, cost control and a commitment to efficient operating reliability--are working." US collected approximately $425 million in ancillary revenue in 2009 and projects a 24% increase on that front in 2010.

A La Carte Pizza

Continental reported a net loss of $282 million, improved 51.9% from a $586 million deficit in the year-ago period, and pointed to a fourth-quarter profit of $85 million as a sign that it is "holding the line on costs and working more efficiently." Executive VP and Chief Marketing Officer Jim Compton said that "business travelers are slowly returning," but he cautioned that "we're still waiting to see any strength in yields." Smisek told reporters and analysts that CO will move aggressively to unbundle its product and continue experimenting with new ways of generating ancillary revenue by taking "thoughtful and measured risks." He explained, "We have historically served a pizza with everything on it. Now we're going to let people not only choose their own pie, but order just one slice if that's what they want."

United Airlines parent UAL Corp. posted a net loss of $651 million, narrowed 87.9% from a $5.4 billion loss in 2008, and said it and the airline industry must continue to pare costs. Chairman and CEO Glenn Tilton said there are "early signs of a recovery" evident but warned that "structural issues exist that extend beyond the control of any airline." He cited "excessive taxation, inadequate [ATC] infrastructure and outdated regulation" as factors impeding US carriers from reaching their potential.

He added, however, that the industry itself still needs to make major changes: "The cost structure of the industry is too high. It is burdensome. We need to take costs out even in robust times." He said technology, unbundling services and partnerships with other airlines will be keys, adding that while UA has achieved "cost control" over the last two years, it must continue to look aggressively for ways to trim expenditures. "There is no upside to decision avoidance. There are no sacred cows."

Delta reported a net loss of $1.24 billion, narrowed considerably from a massive combined DL/NWA deficit of $14.38 billion in 2008 when results were affected by heavy goodwill impairment charges and costs related to the merger. DL executives said merger activities will be largely completed by the end of the current quarter and predicted that results in 2010 will benefit from a lack of integration costs and complications. "We will shortly in the [late] first quarter have just one Delta . . . with the airplanes free-flowing rather than having to operate" two airlines as was the case in 2009, leading to operational restrictions on a number of routes, CEO Richard Anderson said. He added that DL plans to be "disciplined" on capacity this year, with 2010 ASMs expected to be "roughly flat" year-over-year.

American Airlines parent AMR Corp. incurred a $1.47 billion net loss, improved 30.7% from a $2.12 billion deficit in 2008, on a 16.2% decline in revenue to $19.92 billion. "It was a very tough year," Executive VP-Finance and Planning and CFO Tom Horton said, though he cited "a clear positive trend through the second half of 2009" and advance bookings that are "up modestly." He added that there is evidence of a "return in international premium travel, albeit at lower yields."

Brian Straus contributed to this report