News Column

Unexpected Turbulence Could Disrupt Airline Earnings

Oct. 13, 2012

Linda Loyd

airline business, airline earnings, travel, business travel

PHILADELPHIA - Airlines are expected to post solid profits for the third quarter, with fuel prices edging lower.

But analysts said they foresee the industry could hit turbulence the last three months of the year, with business travel bookings softening as companies scale back because of the uncertain economy.

Earnings will kick off next week, with
American Airlines parent AMR Corp. reporting on Wednesday and Southwest Airlines Co. on Thursday.

"We expect the nine major U.S. airlines to produce a solid third quarter," wrote analyst Ray Neidl of Maxim Group LLC in a note, "but below our original expectations."

Airlines benefited in the three months ended Sept. 30 from typically strong summer travel and jet fuel costs that declined in the second half of September.

Then airlines started to see "weakening business demand in September, which we believe will continue into October," said Helane Becker, an analyst with Dahlman Rose & Co., in a client update.

"We continue to remain concerned about the fourth quarter. Much of the commentary about fourth-quarter trends has been uncertain to negative," Becker said. "If business travel trends down, many of the airlines will discount fares to increase leisure travel."

Assuming a lackluster economy for the remainder of this year with economic growth under 2 percent, Neidl projected the industry will earn around $4.4 billion in 2012 vs. $3.5 billion last year. "Next year remains a large unknown, with some economists now predicting a recession," he said.

Airlines have remained profitable, despite volatile fuel prices, because there are fewer of them, with the recent mergers of Delta-Northwest, United-Continental and Southwest-Air Tran.

Airlines have also raised fares, trimmed unprofitable routes, cut back on the number of flights, and added fees for baggage, food, pillows and blankets.

"Our main concern is the potential destruction to the economy if the country were to go over the 'financial cliff,' which would include very large tax increases and spending cuts," Neidl said. "Many companies are now planning travel budgets for next year and this factor has to be considered in how much travel they will be planning."

Southwest Airlines told a Deutsche Bank investor conference in September that it expected third-quarter unit revenue to rise only 2 percent compared with the year-earlier quarter, after a 6 percent increase in the June quarter.

United Airlines said recently that unit revenue, which is passenger revenue for each mile flown, was down 2.5 percent to 3.5 percent last month, compared to September 2011.

Southwest said its planes continued to be full, but the carrier has seen softness in "yields," the price passengers pay for their tickets.

On Friday, Southwest raised "a substantive portion" of its domestic fares by $2 to $5 one-way, JPMorgan analyst Jamie Baker said.

Earlier in the week, United raised fares $4 to $10 per round-trip on many U.S. routes, but rolled back the increase Thursday because few other carriers matched it.

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Source: (c)2012 The Philadelphia Inquirer Distributed by Mclatchy-Tribune News Service.


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