Earnings Roundup: Airlines Soar on Higher Fares

But sequester-related furloughs create near-term headwinds

   
Earnings Roundup: Airlines Soar on Higher Fares

U.S. airlines are finally making money again.

After being left for dead during the Great Recession, then feeling the whiplash of volatile fuel prices, airlines had been struggling to find profits. But for the first quarter of 2013, most carriers posted robust earnings and revenue.

Even in good times, though, risks are always on the radars. Airlines could suffer as a result of the federal government’s sequestration fiasco — particularly its massive furloughs of air traffic controllers, which Airlines4America predicts will cause delays of up to four hours at major hub airports, affecting as many as 6,700 flights per day and one-third of all airline passengers.

Delays and cancellations stemming from sequestration could hurt airline earnings in the second quarter if the standoff is not resolved soon. For some airlines, that could extend the hurt from first-quarter earnings announced this week:

United Continental

United Continental (NYSE:UAL) was the skunk at the airline earnings garden party this week, reporting a $325 million loss (98 cents per share) for the first quarter — worse than the 87-cent loss for the same quarter last year. The good news? UAL still beat Street expectations for a $1.09 loss. Revenue rose slightly to $8.7 billion, a hair above analysts’ estimates.

Although higher labor and maintenance costs were partially offset by lower fuel prices, UAL took an $11 million hit in the quarter due to the FAA’s grounding of Boeing’s (NYSE:BA) 787 Dreamliner in mid-January after two lithium-ion battery fires. UAL, the only U.S. operator of the composite carbon fiber jet, had to divert a 787 flight last December due to an electrical problem unrelated to the battery. The FAA approved BA’s battery fix last Friday, however, clearing the plane’s return to service.

Southwest

Southwest (NYSE:LUV) reported record revenue of $4.1 billion in the first quarter, but net earnings declined 40% to $59 million (8 cents per share). That’s down from $116 million (13 cents per share) in the year-ago quarter. Although the airline benefited from lower fuel costs and fare increases, passenger demand was softer than expected in March and April. However, the airline expects demand to bounce up by summer.

Southwest, which is in the process of integrating its AirTran acquisition, has raised fares and fees while modernizing its fleet of Boeing 737s. This year, LUV hopes to gain $400 million in operational benefits from the AirTran integration. But airline mergers can get messy, as United Continental discovered when system glitches sparked massive delays and cancellations in the midst of its merger. Hopefully LUV learned something from that fiasco.

US Airways

On Tuesday, US Airways (NYSE:LCC) reported quarterly earnings of $44 million (26 cents per share), compared to $48 million (28 cents per share) a year earlier. Revenue was also up 3.5% to $3.4 billion … but these numbers don’t tell the whole story. Last year’s results were inflated by a $73 million gain from a slot-swap with Delta (NYSE:DAL). LCC’s performance was actually much stronger than last year’s, with passenger traffic rising 4.4% and available seat miles — a measure of airline capacity — increasing slightly.

Those strong results are particularly welcome given plans to begin a $11 billion merger with American Airlines parent AMR (PINK:AAMRQ), which could close as early as Aug. 31. The airlines have hit the ground running in preparation for the merger, announcing this week that 29 employee teams currently are analyzing differences in the carriers’ operations. US Air Chairman and CEO Doug Parker will head up the merged airline, which will become the nation’s largest, and will adopt American’s name and systems.

Delta

Delta Air Lines announced a return to first-quarter profitability on Tuesday; EPS of 10 centsbeat analysts’ estimates of 6 cents in the traditionally weak air travel period. While revenue inched up 1% to $8.5 billion in the quarter, Delta CEO Richard Anderson cautioned that the carrier expects unit revenue to slip by 2% to 3% this month because of the sequestration’s impact on federal travel. The airline expects revenue to remain flat in the second quarter.

A year ago, DAL bought ConocoPhillips’ (NYSE:COP) shuttered Trainer, Penn. oil refinery for $150 million to gain control over its biggest and most unpredictable expense — jet fuel. After Delta spent more than $100 million on upgrades to the refinery, Superstorm Sandy hit, resulting in a $68 million fourth-quarter loss for DAL’s subsidiary refinery; it lost another $22 million in the first quarter. While the refinery will start making money soon with plans to begin using cheaper Baaken crude oil later this year, DAL will have to wait to see rewards from its foray into the oil business.

Overall, airlines started to find their footing again in Q1, thanks largely to higher fares and lower gas prices. But between sequestration and merger challenges, they’re facing major headwinds for the rest of the year.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, http://investorplace.com/2013/04/earnings-roundup-airlines-soar-on-higher-fares/.

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