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Are Delta and United's profits masking US industry weakness?

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Could the US airline industry be less healthy than it appears? US carriers are believed to be on track to earn an aggregate net profit of about $2 billion this year (following a $2 billion-plus profit last year), and have been praised for finding a way to earn money in less-than-ideal economic conditions.

But … American Airlines is now operating under Chapter 11 bankruptcy protection (albeit with plenty of cash and revenue to keep operating smoothly and paying its bills). And Pinnacle Airlines Corp., the Memphis-based parent of regionals Pinnacle Airlines, Colgan Air and Mesaba Aviation, said Thursday it has initiated a "comprehensive program to reduce short- and long-term costs and enhance liquidity" and is seeking reworked contracts with both outside vendors/partners and its workers. It warned of a financial crisis next year if it can't find significant savings.

Further, the US air passenger market is stagnant: US majors' combined third-quarter capacity was up just 0.7% year-over-year and the industry, almost across-the-board, is talking about tight capacity control in the current quarter and next year.

Yes, United Airlines (merged with Continental) and Delta Air Lines (merged with Northwest) are posting big profits. Smaller players Alaska Airlines, Spirit Airlines and Allegiant Air are operating with impressive (for the airline business) profit margins of 5% or better.

But, putting those carriers and the two newly-created megacarriers aside, profits aren't that strong. US Airways earned $76 million and JetBlue Airways $35 million in third-quarter net income, hardly robust profits but ones that made them the leaders of the rest of the US industry. The five US majors excluding United and Delta actually incurred a combined $113 million net loss in the third quarter.

So while United and Delta's post-merger financial success (so far) is notable, it may be masking underling weaknesses in a market where unemployment remains well above 8% and, according to the US Bureau of Transportation Statistics, airlines paid 17.2% more per gallon of jet fuel in October 2011 compared to October 2010.

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