‘The Right Trends’

Are US airlines’ prospects finally turning around?

The trend lines, finally, are looking good for the battered US airline industry. Collective losses for the nine largest passenger carriers narrowed considerably in the first quarter, revenue grew at twice the rate of costs and yields were up 5%.

Delta Air Lines CEO Richard Anderson pointed to continuing evidence of “the right trends in the revenue environment” and said he is “optimistic about the rest of the year,” anticipating a “solidly profitable” second quarter. “It appears that the economy has pretty good legs under it,” he added.

US airline executives are exhibiting a generally positive outlook these days, although some caution that, as is always the case in commercial aviation, things could change quickly. Even Anderson warned that controlling costs could become a challenge with fuel prices “volatile.”

US majors posted a collective $1.03 billion net loss in the first quarter, narrowed 44.5% from a $1.86 billion deficit in the year-ago period. Revenue rose 7.4% to $26.91 billion while expenses heightened 3.7% to $27.01 billion, producing an operating loss of $97 million, narrowed 90.1% from $980 million last year during the depths of the recession. Traffic grew 1% while capacity was down 3.1%, leading to a 3.2-point boost in load factor to 78.9%.

Southwest Airlines’ first-quarter net income of $11 million led all carriers and was reversed from a $91 million loss in the year-ago period. The LCC reiterated that it will stick to its no-capacity-growth strategy for the foreseeable future, although it continues to add new destinations. Chairman and CEO Gary Kelly said that over the long term SWA has “tremendous growth opportunities” but noted, “We haven’t met our return on capital targetin a decade and that’s just not acceptable to us. We’re going to err on the side of caution . . . In terms of getting back to growth of 20 [aircraft] per year, I just don’t see it in the cards until we hit our margins.”

Alaska Air Group, parent of Alaska Airlines and Horizon Air, reported its third first-period profit in 11 years and its best since 1999, earning $5.3 million during its “seasonally . . . weakest quarter of the year.” The positive result, reversed from a $19.2 million loss a year earlier, was aided by $23 million generated from baggage fees. JetBlue Airways suffered a net loss of $1 million, down from a profit of $12 million last year, and said it is “taking the right steps to return to sustained profitability.” Results were hindered by poor weather and costs associated with implementing its new reservations system, the carrier said.

After leading US majors with a 2009 annual profit of $134.7 million, AirTran Airways slipped to a $12 million deficit in the 2010 first period owing to higher fuel costs and severe winter weather that disrupted operations, particularly in February. The deficit was a reversal from a $28.7 million profit in the year-ago quarter. “This winter proved to be one of historic inclement weather for much of the East Coast and particularly for some of our busiest operations like Baltimore/Washington and Atlanta,” Chairman, President and CEO Bob Fornaro pointed out.

US Airways posted a net loss of $45 million, narrowed from a $103 million loss last year, and touted a continuing “rate of improvement” that it said likely will result in a “profitable second quarter.” Chairman and CEO Doug Parker described the current revenue environment as “dynamic and improving” and projected that “revenue momentum” will drive profitability in the current quarter.

United Airlines parent UAL Corp. incurred a quarterly loss of $82 million, significantly narrowed from a $382 million deficit in the year-ago period, and noted that it was profitable on an operating basis in the seasonally weak first quarter for the first time since 2000. Chairman, President and CEO Glenn Tilton said that “early signs of recovery in business and premium demand” helped boost results.

CFO Kathryn Mikells added that there were also “strong signs of recovery” in cargo demand and yield and that the carrier is “well on our way to profitability.”

Continental Airlines said its results deteriorated to a net loss of $146 million, widened from a $136 million deficit in the 2009 period, and cautioned that the economic recovery is still in its “early stages.”

CO executives were more cautious in their rhetoric than rival Delta. “Business travel is indeed coming back, but it’s coming back slowly,” CO Chairman, President and CEO Jeff Smisek said, explaining that it is still “uncertain” whether business passenger levels will recover fully.

DL’s first-quarter net loss was $256 million, narrowed from a $794 million deficit a year ago. “We continue to see solid advance bookings . . . across all geographic regions,” President Ed Bastian stated. “Clearly the improved strength we’re seeing comes from improved corporate travel. We’re seeing corporate travel improve across all geographic regions, certainly in New York and across the Atlantic . . . We’re not quite at 2008 levels [of business passengers]. We’re close to 2007 levels and we expect to be up to 2008” later this year.

Regarding the merger with Northwest Airlines, Bastian said DL/NWA are “now operating on a single technology platform” and the “heavy lifting of integration is behind us.” He claimed DL achieved $200 million in merger synergies in the first quarter and is “now at $1 billion in annual run rate synergies.” It did incur $46 million in merger-related expenses in the quarter and expects another $70 million in merger costs for the remainder of the year.

American Airlines parent AMR Corp. reported what executives called a “disappointing” first-quarter net loss of $505 million, sharply higher than a loss of $375 million in the year-ago quarter. The result contrasted with the general trend of improving financial performance at other US airlines. “As the results show, the first quarter proved to be quite challenging for our company. Lingering weakness in the economy, rising fuel prices and cost pressures mainly resulting from capacity cuts combined to produce a disappointing result,” Executive VP-Finance and Planning and CFO Tom Horton said.

Christine Boynton contributed to this report.