AirTran Holdings reported passenger unit revenue rose 12.6% during the second quarter, driving record revenues and second quarter profit despite a per gallon fuel increase of over 37%. For the second quarter, according to CFO Arne Haak who briefed analysts yesterday, revenue rose 16.1% to USD700.6 million and, for the third quarter in a row, represented the highest quarterly revenue in company history at a time when it is operating five fewer aircraft.
The company reported a second quarter profit of USD12.4 million, down more than 84%, owing to rising fuel expenses. The company also cited a decline of USD66.1 million owing to USD34 million in net losses on derivative financial instruments this year compared to the USD27.3 million gain experienced in the year-ago period. During 2Q2009 it also experienced a USD4 million gain on early debt extinguishment.
“We expect year over year earnings to accelerate in the back half of the year,” said Haak. This follows an accelerating pace in the second quarter. April PRASM was up 6% followed by 12.5% in May and 19.5% in June. The PRASM performance was a bit disappointing because it missed our outlook given in the first quarter. We were just too optimistic for what is normally a shoulder period in May. But year-over-year trends are good and we expect that to continue. Our other revenues were flat so our total revenues did not grow as fast as passenger revenues. However, the majority of the shortfall was in second and oversized bags and passenger behavior changed.”
Ancillaries and advance bookings strong
CEO Bob Fornaro expressed confidence in ancillary revenue activity despite the lower revenue. He noted the airline has a changing mix of passengers with a different set of needs for the business traveler than the leisure traveler. “We are getting better at optimizing our offers on who and when and what we offer,” said Haak, who agreed with other airlines that said there is still plenty of room for ancillary revenue development. “There is also an upside to it since we have lower expenses from not carrying as many bags and reducing ramp personnel. In addition we are working on becoming more technology intensive. I really believe the difference right now is the fundamental improvement in the underlying yields and that goes to the shift in the type of passengers we are carrying.”
In the third quarter, Haak reported that advanced bookings and yield trends through the summer remain exceptionally strong. “July unit revenues are trending up 17-18% year over year while August is up 14-15% year over year. September is more difficult to predict but based on the trends and the strong base of advanced bookings we are expecting Q3 passenger unit revenue to be up between 14.5% and 16.5% on a 1% increase in ASMs. However, September is also a shoulder month and we could experience what we did in May. Total unit revenue is expected to be between 12.5% and 14.5% while our third quarter non-fuel unit costs are expected to increase 4-5% while the full year remains unchanged at 4-5%".
Fornaro added that there has been some capacity moderation in the market. “The supply and demand situation is getting better and we have fewer new routes, unlike last year when we had a lot of new routes.”
In addition, the company retired USD90.4 million in convertible debt and reduced capital requirements by over USD200 million between 2010 and 2012 as it reached an agreement with Boeing to revise its B737 delivery schedule. It deferred deliveries of nine B737 aircraft between 2011 and 2014 until later dates, beginning in 2015 and ending in 2017. The companies also agreed to a 10-year lease of two additional B717 aircraft beginning in 2011. Its financial progress resulted in being the only airline that was upgraded by both S&P and Moody's.
AirTran said it took USD26.4 million in losses after taxes on a drop in the value of its fuel hedges compared to the year-ago period when its profit included a USD31 million gain on fuel hedges. “The value is just not as favourable as it was 90 days ago owing to the drop in crude oil which is a positive trend for the company,” said Haak. “On the cost side adjusted non-fuel CASM is up 2.5% year on year, well ahead of the fuel guidance we gave in the first quarter which was 4-4.5% and the update we gave six weeks ago which was 3.5%.” Operating expenses increased 17.6% to USD632 million.
Operating income in the second quarter of 2010 was USD68.2 million, USD2.1 million higher than the prior year on the favorable impact of a 16.1% increase in total revenue that exceeded the substantial increase in the cost of jet fuel.
Network and Milwaukee updates
"Our network diversification efforts over the past year have positively impacted both our revenue position and our operational performance,” said Kevin Healy, senior vice president, marketing and planning. “With these diversification efforts in place, we can now focus on growing and expanding our route network."
CEO Bob Fornaro reported that Milwaukee is making significant progress, the most of any region in the system. “It was solidly profitable in the second quarter and, in unit revenue growth, far outpaces the average performance of any region,” he said. “Our passenger unit revenue improvement was over 20% and in June it was above 30% in Milwaukee so that market is exceptionally strong. The gain is primarily in yield because loads don’t have a lot of room to grow. There is also a change in connecting traffic and we have a greater mix of O&D than connecting. That is a big piece of what is driving our overall performance and is especially true in Milwaukee.”
The airline's passenger revenue per available seat mile (PRASM) was 10.13 cents, an improvement of 12.6% over the prior year. Total revenue per available seat mile (TRASM) reached its highest second quarter level since 2001 at 11.19 cents, an improvement of 10.7% over the prior year.
Unrestricted cash position at quarter's end was USD535.3 million and its revolving line of credit was undrawn. During the quarter, the company revised and extended the term of its secured revolving credit facility. The revised $100 million facility has been extended to 31-Dec-2012.
Quarterly records were also set for revenue passenger miles flown, load factor and enplaned passengers. For the first time in AirTran history, load factor topped 83% in the second quarter and was well above 83% in business class, the first occurrence for that metric.
AirTran flew 6.5 million passengers in the quarter - a 5.3% jump on a 7.9% increase in RPMs to 5.2 billion. Available seat miles rose 4.9% to 6.2 billion. Stage length rose 3%. “Typically and increase in capacity, loaf factor and stage length comes at the expense of yield,” said Fornaro. “But our second quarter yield increased 9.4% to 12.19 cents, the highest year on year growth in four years despite the increasing stage length.”