US airlines are providing two lessons for analysts: that this time really is different and the industry can make money despite high fuel prices. Following a host of airlines to profitability, except Southwest and American, US Airways remained profitable despite posting a 68.4% negative swing on profitability.
Indeed, US Airways CEO Doug Parker summed it up nicely when he said: “The average fuel price per gallon is almost exactly the same in 2011 as it was in the industry’s worst year in 2008 when US Airways lost USD800 million and, now, in 2011 we’ve made nearly USD100 million. That major improvement is clearly not due to the improvement in the global economy. It has come from a lot of hard work and a real industry transformation that included consolidation, capacity constraints and cost controls as well as management that cares more about return on capital than about growth and market share.”
What is so important about what Mr Parker said is the fact that this is now a permanent state of affairs for the US airline industry with capacity and cost discipline resulting in higher revenues.
President Scott Kirby echoed his airline counterparts in reporting no evidence the revenue environment is slowing, adding June represented the low point in industry revenue for 2011. He predicted the economy would continue “muddling along” in a weak recovery despite the fact corporate earnings were good. Mr Kirby said the European economic crisis would produce a silver lining in lower oil prices. However, news a settlement was reached on stabilising the European economy, reached yesterday, may change that.
“Demand is strong and pricing is strong,” he told analysts, pointing out third quarter results including Hurricane Irene, the tax holiday when the authorisation to collect ticket taxes expired for two weeks as well as the move of Yom Kippur into September. “If there is a canary in the coal mine we don’t see it yet. Trans-Atlantic outperformed other regions. October revenue per available seat mile (RASM) was up 10% and fourth quarter RASM will also be up about 10% as will the year. We expect to be able to recover most of the increase in fuel prices year-on-year by responding to increases with prices and fares.”
LCCs are the outliers
Mr Parker refused to take the bait when JP Morgan’s Jamie Baker suggested that Southwest and JetBlue represented bad actors in the business by not accepting more fare increases which, he said, was standing in the industry’s way to gain higher margins. He did address industry structural changes, however, saying it was much healthier, something he has said would happen with consolidation.
“We can always do better but the fragmentation, which was huge a few years ago, has largely been addressed,” he said. “Even with labour; we all have our labour issues, but employees seem to be understanding that the best way for them to do as well as they can is for the industry to be as strong as it can be. Management running the airlines are as good as ever was.”
Analysts asked about whether US Airways would be interested in buying the Washington National slots Republic Airways just announced it wanted to sell but Mr Kirby indicated it was much ado about nothing since US Airways had a right of first refusal on the slots and had been operating them ever since the deal with Republic Airways Holdings a few years ago when it needed to raise money.
Questions arose whether the Delta slot swap at LaGuardia and Washington National would go ahead if the Department of Justice (DOJ) did not come to a conclusion favouring it after 26 months of investigation and before the 22-Nov auction day. Theoretically, US Airways could go ahead with the deal but it was reticent to make any commitment saying it would make a decision when it knows what the DOJ was going to do. Delta is the only one divesting slots and will thus get the revenues from those deals.
In response to a question why US Airways did not have an even-more-room, coach product, Mr Kirby indicated it had Choice Seats which charges more for window, aisle and front-of-the-cabin seats, suggesting it just came to a different conclusion than its peers on the economics because it meant seat density would remain the same.
Total system capacity for 2011 will be up only 1% year-on-year with domestic up slightly and international up approximately 3%.
Fourth quarter fuel is expected to be between USD3.10 and USD3.15 per gallon for mainline jet fuel. Cost per available seat mile (CASM) ex fuel and profit sharing will be up between 3-5% in the fourth quarter and between 0-2% for the year.
“It takes a while to adjust to fuel prices,” explained Mr Parker. “If this is the new normal and we think it is, what you’ll see is continuing revenue strength which gets the industry and us to a point where we have margin expansion even if fuel is high. In addition, continued capacity discipline over time will result in better revenue streams because the industry is now where it can adjust more quickly to fuel changes.”
Fourth quarter available seat miles (ASMs) will drop to 17.4 billion from the 19 billion in the third quarter and will total about 72.6 billion for the year. Capacity in 2012 will be up less than 1%, according to CFO Derek Kerr who briefed analysts yesterday. He cited the fact 2012 was a leap year as well as the planned replacement of B737s with higher-gauge A321s.
US Airways is projecting other revenues to surpass USD1 billion this year, coming it at approximately USD312 million in 4Q and USD1.3 billion for the year, nearly triple the results from 2010.
Express airlines will fly about 3.32 billion ASMs down from the 3.25 in the third quarter, finishing the year at about 14.06 billion. CASM ex fuel and special items should rise 7-9% for the fourth quarter and 6-8% for the year. The company continues to have long-term commitments on its regional aircraft through 2014 when it will have a meaningful capacity flexibility, although it just cut a deal with SkyWest is replace some service.
Advance bookings remain strong with Thanksgiving running four points ahead on load factor year-on-year while yield was up 9% in the first half of November and by double digits in the second half of the month. Bookings are ahead 2% for December and booked yields were strong for the fourth quarter. Mr Kirby also said market shifted by 2% in favour of US Airways.com as online travel agency (OTAs) bookings lost the same percentages.
The same has been reported with all the airlines, with Mr Kirby suggesting it had to do with consumers shopping at OTAs and then booking with the airline because it provides a better customer service experience when things go wrong.
Net income was USD76 million in the third quarter and, as with its peers it was hit by USD356 million, 44%, in higher fuel costs. Ex special items, the company’s net was USD95 million, down from the USD243 million posted in the 2010 third quarter.
Mr Kerr cited the strong pricing environment for the revenue results which allowed the company to offset much of the fuel increases.
Both United and US Airways echoed peers in reporting strong demand as US Airways cited its highest third-quarter consolidated revenue and total revenue per available seat mile (TRASM) in history. Total operating revenues rose 8.1% to USD3.4 billion in the quarter as TRASM jumped 9.4% to USD 15.21 cents on a 1.2% drop in consolidated capacity, thanks to a 7.8% increase in yields to USD 15.94 cents. PRASM rose 10.2% to USD 13.56 cents.
Mainline passenger revenues rose 9.7% to USD2.2 billion year-on-year while Express passenger revenues jumped 6.6% to USD796 million. Mainline load factor rose 2.1 points to 86.5% as yield rose 7.6% to USD 13.76 cents. PRASM rose 10.4% to USD 11.91 cents. US Airways also cited strong demand and yields for its improved revenues.
Express yield rose 11.3% to USD 29.07 cents while PRASM jumped 7% to USD 22.35 cents. US Airways Express fuel rose 28.4% to USD273 million as other costs rose 4.8% to USD521 million.
Other revenues were up only 1% to USD333 million while cargo jumped 8% to USD40 million. When asked if ancillary growth has run its course, Mr Kirby rejected the idea but did say the impact of a step change in revenues was probably over.
“The next step function increases will be in selling new products as opposed to bag charging more for a better seat or having a product that allows the customer to move to the front of the line at security of in boarding,” he said. “There are opportunities and there will more when we get the ability to sell through the GDSs [Global Distribution Systems] and that represents hundreds of millions of dollars of opportunity.”
Evidence of its cost focus is the fact that CASM ex fuel, special items and profit sharing, rose only 1.7% to USD 8.06 cents, despite a drop in capacity. Total operating expenses in the third quarter were up 13.75% to USD3.3 billion. Operating income was down 42.8% to USD180 million. Mr Kerr indicated the CASM increases was also related to increased wages and revenue-related costs.
Mainline CASM was up 14.1% to USD 12.93 cents on a 0.6% decline in ASMs to 19 billion. Special items totalling USD19 million included USD13 million in legal costs on the slot swap with Delta. The swap will occur on 22-Nov-2011 with redistribution expected by the end of the month. It also incurred a USD21 million non-cash tax charge on the sale of auction-rate securities (ARSs). However, the charges were offset in part by a USD15 special credit on the ARSs.
Express CASM ex fuel and special items also rose, up 9.8% to USD 14.63 on a 4.6% drop in capacity, driven by higher maintenance costs on subsidiary PSAs CRJ-200 fleet. CASM increased 19.8% to USD 22.29 cents.
Consolidated CASM rose 15.1% to USD 14.41 cents while CASM ex fuel and special items increased 2.5% to USD 9.14 cents.
The company finished the quarter with USD2.4 billion in total cash and cash equivalents of which USD384 million was restricted resulting in the company’s highest third-quarter cash balance since 2007.
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