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US airlines see some signs of improvement, but cautious optimism entering Winter

Analysis

US carriers' Nov-2009 traffic results painted an improved picture after the carnage of the past 12 months, with yield and load factor improvements among the major US airlines, due to careful capacity management and a gradual pick-up in air travel demand (both leisure and business).

US airlines are also increasingly focusing on the fundamentals: improving their balance sheet, boosting ancillary revenue execution, focusing on cost-control measures and reducing capital expenditure.

Southwest trumps JetBlue, US Airways and Continental in the yield growth stakes

Southwest reported a double-digit yield improvement in Nov-2009, with JetBlue and US Airways reporting on small yield reductions. Continental Airlines, however, continued to feel the effects of the challenging operating environment, with continued (systemwide) PRASM and RASM reductions in the month.

Selected US carriers' systemwide yield highlights: Nov-2009

PRASM

RASM

Southwest (Estimated)

+12%

n/a

JetBlue (Estimated)

-1%

n/a

US Airways (Estimated)

-2%

Flat

Continental (Estimated)

-7.0% to -9.0%

-8.0% to -10.0%

During 3Q2009, Southwest's passenger yields, while slipping 12.0% to USD 12.94 (as discounting activity reduced the average passenger fare by 8.4% to USD113.95), were higher than the other LCCs, and even some of the network carriers, which continue to struggle on trans-Atlantic and Pacific markets.

Select US carriers' yield (US cent miles) and yield growth (year-on-year change): 3Q2009

Load factor improvements across the board (with the exception of Delta and US Airways)

All but two of the eight US majors (with the exception of Delta and US Airways) reported load factor improvements in Nov-2009, reflecting continued capacity reductions by the majority of the carriers and signs of underlying improvements in demand as the US economy recovers.

US airlines domestic traffic^ highlights: Nov-2009

Traffic (RPMs) (bill)

% Change

Capacity (ASMs) (bill)

% Change

Load factor (%)

% Change

Traffic - pax (mill)

% Change

Delta/Northwest

8.6

-4.6%

10.8

-4.2%

79.8%

-0.3 ppts

n/a

n/a

American

6.0

+1.4%

7.4

-2.0%

80.4%

+2.7 ppts

n/a

n/a

Southwest

5.9

+11.7%

7.7

-7.7%

76.5%

+13.3 ppts

7.0

+7.6%

United

4.3

-1.0%

5.3

-3.8%

81.4%

+2.3 ppts

n/a

n/a

US Airways

3.4

-4.7%

4.3

-3.5%

78.5%

-0.9 ppts

3.6

-4.9%

Continental

3.2

+2.9%

3.8

-0.5%

83.3%

+2.7 ppts

3.5

-0.5%

JetBlue

2.0

+7.7%

2.6

+5.3%

77.4%

+1.7 ppts

1.8

+6.6%

AirTran

1.5

+10.5%

1.9

+9.2%

76.7%

+0.9 ppts

1.9

+5.5%

Only AirTran, JetBlue and Allegiant on the growth path

JetBlue and AirTran were the only two carriers among the majors growing capacity in the month, while Allegiant stood out among the smaller carriers, with its continued expansionist strategy, which saw the carrier increase scheduled service capacity by 25%.

Overall, the six largest US carriers reported their best traffic results in Nov-2009 of the past 18 months, with smaller traffic reductions in the domestic market.

The carriers also benefited from the timing of Thanksgiving, which fell entirely in November this year, compared to November/December in 2008.

Double digit RASM growth for Southwest

Southwest, the largest US LCC, stated it expects passenger revenue per ASM to have increased in the 12% range in Nov-2009 - for the third consecutive month of increases and the first month this year of double-digit improvements - thanks to notable capacity cut (-7.7% year-on-year) during the month.

Southwest PRASM year-on-year increase: Jan-2009 to Oct-2009

Impressive load factor improvements for Southwest

Southwest transported 7.0 million revenue passengers (+7.6% year-on-year), with load factors rising an impressive 13.3 ppts (to 79.2%) for five consecutive months of healthy load factor gains.

Southwest traffic highlights: Nov-2009

Nov-2009

% Change

Traffic - revenue pax (mill)

7.0

+7.6%

Traffic RPMs (bill)

5.9

+11.7%

Capacity ASMs (bill)

7.7

-7.7%

Load factor (%)

76.5%

+13.3 ppts

Despite reporting the largest load factor improvement among the major US airlines, Southwest, as usual, reported the lowest load factors in the month. AirTran and JetBlue reported the next lowest load factors.

Select US airline load factor (%) and load factor growth (ppts): Nov-2009

US network carriers' occupancy levels higher than their LCC counterparts

America's full service airlines have pared back capacity so much that they are now consistently operating with higher load factors than their LCC competitors.

Accordingly, the US domestic industry has seen a 10-11% load factor increase in 2008 over 2001 levels.

US carriers international and domestic passenger load factor: 2001 to 2008

Conversely, the smaller LCCs would be relishing the cutbacks by larger rivals, as it provides more expansion opportunities at the start of a growth cycle.

Smallest JetBlue yield contraction in seven months

JetBlue reported a 1% reduction in passenger revenue per available seat mile (PRASM) for the month (off last year's positive base), the smallest yield contraction in seven months.

JetBlue PRASM year-on-year increase: May-2007 to Nov-2009

Also in the month, the carrier reported a 6.6% increase in revenue passenger numbers to 1.8 million, as traffic (RPMs) increased 7.7% on a 5.3% capacity (ASMs) increase, resulting in a 1.7 ppt load factor improvement to 77.4%.

JetBlue financial highlights: Nov-2009

Nov-2009

% Change

Traffic - revenue pax (mill)

1.8

+6.6%

Traffic RPMs (bill)

2.0

+7.7%

Capacity ASMs (bill)

2.6

+5.3%

Load factor (%)

77.4%

+1.7 ppts

Continental Airlines' yields and cash outlook improves

Continental Airlines reported an encouraging set of traffic results for November, with record mainline load factors, smaller falls in yields and an improving cash outlook, reflecting a steady improvement in the US airline operating environment.

In Nov-2009, Continental recorded a consolidated traffic (RPM) increase of 2.9% and a capacity decrease (ASM) of 1.2% year-on-year. Consolidated (mainline plus regional) load factor reached 80.5%, up 3.2 ppts year-on-year and the airline achieved a record mainline load factor of 81.1%, up 3.3 points.

The carrier reported a domestic mainline Nov-2009 load factor of 83.3%, 2.7 points above the Nov-2008 domestic mainline load factor, and a record international mainline load factor of 78.8%, up 3.8 ppts year-on-year.

Best PRASM performance since Feb-2009

For November 2009, Continental's consolidated passenger revenue per available seat mile (PRASM) is estimated to have decreased between 7.0 and 9.0% compared to November 2008, while mainline PRASM is estimated to have decreased between 8.0 and 10.0%. It follows a 14.2% reduction in consolidated PRASM in Oct-2009. Continental stated the ranges of the year-over-year RASM estimates for the month of November are "wider than usual, due to processing delays associated with the transition to Star Alliance".

Continental Airlines consolidated PRASM (US cents per ASM): Feb-2008 to Nov-2009

Furthermore, Continental stated it anticipates ending 2009 with an unrestricted cash, cash equivalents and short-term investments balance of approximately USD2.5 billion - an improvement from the USD2.4 billion estimated as part of its third quarter earnings announcement on 21-Oct-2009. Continental ended 3Q2009 with an unrestricted cash balance of approximately USD2.55 billion, down from USD2.77 billion at 30-Jun-2009.

US Airways seeing positive revenue trends

US Airways President, Scott Kirby, stated that the carrier's Nov-2009 consolidated (mainline and Express) passenger revenue per available seat mile (PRASM) decreased by approximately 2%, a notable improvement from the 10% reduction in the previous month.

Total revenue per ASM was flat on a year-on-basis, for the first month of positive growth since 2008. In Oct-2009, RASM decreased by approximately 9%.

Mr Kirby added that the revenue environment "continues to show core sequential improvement with strength in close-in bookings. Additionally, both booked yields and corporate revenue are now up on a year-over-year basis."

US Airways' total RASM and PRASM growth (%): Jan-2009 to Nov-2009

Also in the month, US Airways reported a 4.7% domestic traffic (RPMs) reduction, as the carrier reduced domestic capacity (ASMs) by 3.5%, resulting in a 0.9 ppt load factor reduction to 78.5%.

US Airways Mainline traffic highlights: Nov-2009

Nov-2009

% Change

Traffic - enplanements (mill)

3.9

-4.2%

Domestic enplanements (mill)

3.5

-4.9%

Traffic RPMs (bill)

4.2

-1.8%

Domestic traffic (RPMs) (bill)

3.4

-4.7%

Capacity ASMs (bill)

5.4

-1.3%

Domestic capacity (ASMs) (bill)

4.3

-3.5%

Load factor (%)

77.3%

-0.4 ppts

Domestic load factor (%)

78.5%

-0.9 ppts

AirTran reports record traffic and capacity levels

AirTran reported that Nov-2009 revenue passenger miles (RPMs) and available seat miles (ASMs) represented new monthly records for the month.

During the month, traffic (RPMs) increased 10.5%, outpacing a 9.8% increase in capacity (ASMs), resulting in a 0.9 ppt load factor improvement to 76.7%. Passenger numbers were up 5.5% to 1.9 million.

AirTran traffic highlights: Nov-2009

Nov-2009

% Change

Traffic -pax (mill)

1.9

+5.5%

Traffic RPMs (bill)

1.5

+10.5%

Capacity ASMs (bill)

1.9

+9.2%

Load factor (%)

76.7%

+0.9 ppts

LCCs driving traffic growth in Nov-2009

AirTran's traffic (RPMs) growth in the month was among the highest in the US domestic market, only exceeded by Allegiant and Southwest Airlines. JetBlue also increased traffic notably in the month, indicating the LCCs are taking advantage of growth opportunities in the market.

Select US airline traffic (RPMs) and traffic growth (%): Nov-2009

Allegiant load factor slips for sixth consecutive month, but remains above 89%

Allegiant, which has been robust throughout the global economic slowdown, saw its system passenger load factor slip for the sixth consecutive month in Nov-2009 (down 0.5 ppts), although it remains above 85% (at to 86.5%) and scheduled load factors exceeded 90% for the first November in the carrier's history (at 90.4%).

The slight reduction in system load factors reflects the carrier's massive 24.6% year-on-year increase in scheduled capacity (ASMs), with total system capacity up 25.0%.

Allegiant schedule service capacity (ASMs) growth: Mar-2007 to Nov-2009

This increase, which is lower than the capacity additions over the past few months, comes at a time when the majority of US carriers are reducing capacity or only increasing capacity by single-digit levels.

North American carriers' domestic passenger capacity growth (% change year-on-year): Nov-2009

Also in the month, Allegiant's scheduled passenger numbers soared 19.5% to slightly over 374,000, with system passenger numbers up 19.9% to slightly under 409,000 (although this passenger figure is considerably lower than the major network and LCC carriers).

Allegiant monthly passenger traffic (millions) and load factor (%): 12 months to Nov-2008 vs 12 months to Nov-2009

Rapid expansion while others contract

Allegiant plans to continue to its growth trend in 4Q2009, with a capacity (ASM) increase of approximately 22% for a full-year capacity growth of approximately 22%. The growth is expected to continue into 2010, with first quarter capacity growth of approximately 15%.

Allegiant Capacity and Departure Growth: 4Q2009, FY2009 and 1Q2010

4Q20209 Growth (year-on-year)

FY2009 Growth (year-on-year)

1Q2010 (year-on-year)

ASM Growth - system

Approximately 23%

Approximately 22%

Approximately 15%

Departure Growth - system

Approximately 15%

Approximately 20%

Approximately 7%

ASM Growth - scheduled

Approximately 23%

Approximately 26%

Approximately 15%

Departure Growth - scheduled

Approximately 16%

Approximately 24%

Approximately 7%

Departures per day

Approximately 2.4

n/a

n/a

Block hours per aircraft per day

Approximately 5.6

n/a

n/a

Frontier Airlines and Midwest Airlines help boost Republic Airways' passenger numbers

Republic Airways reported a more than doubling in traffic (RPMs) in Nov-2009, largely arising form the company's recent acquisitions of Frontier Airlines and Midwest Airlines on 01-Oct-2009 and 01-Aug-2009, respectively.

Republic Airways reported a 120% jump in 'branded operations' (traffic (RPMs) in the month, on a 100% capacity (ASMs) increase (comparatively, capacity on branded operations was down 0.7% in the month). Load factors improved 6.9 ppts to 75.6% in the month.

The 'branded operations', which include all operations for Frontier Airlines (from 01-Oct-2009), Midwest Airlines (from 01-Aug-2009) t and Mokulele Airlines (between 01-Jul-2009 and 14-Oct-2009), represented 56% of traffic (RPMs) and 54% of capacity (ASMs) in the month.

Challenges remain ahead of the seasonally weak Winter period

According to ATA, 2009 capacity reductions by US airlines have been the deepest since 1942. This extreme capacity control, combined with opportunistic capital raising exercises, have helped position the US airlines to survive the tough Winter that lies ahead.

This strict capacity management has also meant that US airlines are operating at near record load factors, which is partially making up for reduced air fares, although there are signs that yields are now starting a slow recovery.

A sustainable recovery in the US air travel industry is, however, heavily reliant on continued economic improvement, especially for premium travel.

ATA President and CEO, James C May, recently commented that it is "increasingly apparent that the economic head winds facing the airlines and their customers are anything but behind us".

Mr May also warned that "while other sectors may be seeing signs that the economy is getting back on track, the airline industry has faced challenges in its effort to generate revenue".

This commentary may begin to become more optimistic in coming months, as evidence builds of a recovery.

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