Is the Recovery Real?

While US consumers are clearly still jittery about the nation's fragile economic recovery, the country's major airlines believe they've found a formula for operating profitably even in a slow-growth environment: Stay disciplined on capacity, develop new sources of revenue via ancillary charges and keep nonfuel costs under control.

With Delta Air Lines leading the way with a $467 million second-quarter profit, the US's nine largest carriers posted cumulative net income of $1.45 billion for the three months ended June 30, turned around from a net loss of $556 million in the year-ago period. DL CEO Richard Anderson characterized the revenue environment as "good but not yet great," yet still predicted the airline would be "solidly profitable" for the full year.

US airline executives discussing second-quarter results insisted the profitable period won't tempt them to raise capacity. "One profitable quarter does not necessarily mean a sustainable long-term business model," US Airways Chairman and CEO Doug Parker told analysts and reporters. Adding capacity in the US market now would "defy logic," he said.

US majors' collective second-quarter capacity was flat at 217.9 billion ASMs while traffic rose only 1.6% to 182.06 billion RPMs, producing a load factor of 83.5%, up 1.3 points. The carriers enjoyed an 18.5% year-over-year rise in combined revenue to $31.47 billion, outpacing a 9.5% climb in expenses to $28.85 billion that was attributable mostly to higher fuel costs. Operating income was $2.82 billion, significantly widened from a $182 million operating profit in the year-ago period. All nine carriers were profitable on an operating basis and only American Airlines incurred a net loss. The nine’s average yield jumped 14.4% as RASM lifted 17% and CASM grew 9.6%. Excluding fuel, CASM increased just 1.9%.

DL said its second-quarter result was its "best in a decade" but emphasized that it will continue to hold capacity expansion down. Anderson said full-year 2010 system capacity will be up 1%-1.5% while 2011 system capacity will increase 1%-3% "at most." President Ed Bastian said DL is being "cautious in our outlook" but noted the industry now has been in a recovery mode for about one year. "Advance bookings remain strong across the system," he noted.

US's second-quarter net income of $279 million was nearly a fivefold increase over a $58 million profit in the year-ago period. Executive VP and CFO Derek Kerr said there is "no improvement, no worsening" in the economic environment. "This feels to us like a tepid recovery, but certainly not one that double dips," he commented. Parker said full-year ASMs are projected to rise 1% year-over-year including a 1%-2% cut in US mainline domestic capacity.

United Airlines parent UAL Corp. reported second-quarter net income of $273 million, significantly widened from a $28 million profit in the year-ago period and its best second-quarter result since 1999. Revenue soared 28.4% to $5.16 billion. Chairman, President and CEO Glenn Tilton pointed out that unit revenue on Asia operations rose 52% year-over-year with premium cabin revenue on transpacific flights up 46% compared to the prior-year quarter. "Asia continues to perform well and we're very excited about it," he said.

He noted that across the business, "corporate contracts, premium travel . . . are currently performing very well." But UA has no plans to add seats, he assured: "We will remain fully committed to capacity discipline." He said the carrier also will remain committed to ancillary revenue, which he called "the future" of the business. "I think there's a billion dollars [in revenue] in bags alone [per year] and right now we're only getting about $400 million," he said.

UA merger partner Continental Airlines earned quarterly net income of $233 million, reversed from a $213 million loss in the year-ago period. With an emphasis on "rigorous capacity discipline," it projects full-year capacity will rise just 0.5%-1.5% year-over-year, including an 0.5%-1.5% drop in domestic mainline ASMs.

Southwest Airlines' second-quarter net income heightened 23.1% to $112 million from $91 million in the year-ago period and the LCC expressed confidence in "continued strong revenue performance" for the remainder of 2010. The Dallas-based carrier's quarterly revenue increased 21.1% to $3.17 billion, its second-highest-ever revenue total for a second quarter. Its revenue growth during the three months ended June 30 "is the best in the industry domestically" despite the fact that it operated "slightly less capacity" compared to 2009, Chairman, President and CEO Gary Kelly told analysts. "It's a revenue story. That's what drove our earnings growth."

CFO Laura Wright said the carrier is offering "fewer fare sales" compared to last year and is seeing "strong overall consumer demand." But like other US airlines, SWA said it is committed to little-to-no capacity growth, at least through 2011.

Alaska Airlines and Horizon Air parent Alaska Air Group tallied a second-quarter net profit of $58.6 million, double the $29.1 million earned in the year-ago period, attributing the increase to "strong revenues and good cost control." It noted that its fuel bill heightened 98.6% to $255 million. JetBlue Airways' second-quarter net income improved 50% to $30 million from $20 million in the prior-year period. AirTran Airways posted second-quarter net income of $12.4 million, down 84.2% from a $78.4 million profit in the year-ago period, calling the result a "solid performance." It pointed out that it "set quarterly records for RPMs flown, load factor and enplaned passengers."

American Airlines’ parent AMR Corp. incurred a second-quarter net loss of $11 million, narrowed from a $390 million deficit in the year-ago period. "Losing money is not acceptable," said VP-Finance and CFO Tom Horton, who was promoted to the post of president. "But we believe the improvement we're seeing indicates we're heading in the right direction." Chairman and CEO Gerard Arpey put the capacity question in perspective: "I think certainly our bias after the past 10 years with the industry losing over $50 billion . . . should be cautious as it relates to capacity."

Christine Boynton contributed to this report