The first-quarter earnings reports of major U.S. airlines added hard numbers to a trend we sort of knew intuitively: in a capital-intensive, narrow-margin business, it’s pretty easy to turn a profit into a loss.
Altogether, Delta Air Lines (NYSE:DAL), United Continental (NYSE:UAL) American Airlines’ parent AMR Corp. (NYSE:AMR) and US Airways (NYSE:LLC) lost more than $1billion in the first quarter.
Southwest (NYSE:LUV) managed to eke out a $5 million profit for the quarter, down from $11 million from the same quarter a year ago. Still, that tiny profit came on $3.1 billion in revenue.
Here are the five main things we learned from US airlines’ first-quarter earnings:
1. Fuel Prices Are Still The Bane Of Airlines’ Existence. Jet fuel represents airlines’ biggest cost center and with prices at about $3.20 a gallon — their highest levels since September 2008 –airlines are struggling. The Air Transport Association says if jet fuel prices hold over $3 a gallon throughout the rest of the year, it would add $15 billion to airlines’ fuel bill — 38% higher than last year. Although fuel-hedging is an option, it’s becoming not only more expensive, but also less effective, since jet-fuel costs are rising faster than crude oil prices. For example, Southwest, which has been aggressive in fuel hedging, projects second-quarter fuel costs to hit $3.35 a gallon.
2. Fare Hikes Aren’t Enough To Boost Sinking Margins. The good news is that fare hikes drove airlines’ passenger revenue up by 13% in March. The bad news is it’s still not enough to offset fuel costs. Airlines have raised fares seven times so far this year and while it has helped mitigate some of the sector’s losses, passengers are starting to rebel and competitors – most notably, Southwest – are making it harder to do. The past three attempts at fare increases have failed.
3. Capacity Cuts Are The Next Line Of Defense. With higher fuel prices making flights less profitable, airlines are turning to capacity cuts to ease the pressure on margins. Delta, US Air and American are cutting capacity for the second time this year; United Continental will cut capacity by 1% next month and another 4% in September.
4. The Japan Crisis Hit Airlines Hard. The March 11 earthquake, tsunami and subsequent nuclear crisis in Japan took a toll on airlines as they were forced to make dramatic short-term cuts in capacity to the Asia-Pacific region. If all goes well, these capacity cuts will be temporary, but with the situation at the crippled Fukushima I nuclear plant far from resolved and radiation leakage still continuing, air travelers are likely to be scared away from Japan in the near future. The problem is most acute for carriers like Delta, American and United Continental that have major exposure to the region.
5. Mergers Promise Long-term Savings, But Short-term Costs. Consolidation offers long-term opportunities for airlines to cut operating costs and boost profitability. But in the short term, the costs of integration will buffet earnings. Case in point, United Continental’s first quarter earnings took a $77 million integration-related hit from the merger. Since Southwest’s merger deal with AirTran (NYSE:AAI) was blessed by the Justice Department on Tuesday, Southwest will soon start the integration process in earnest — and that means consolidating everything from labor union agreements, aircraft fleets and reservations systems to extending ‘Bags Fly Free’ policies to AirTran. Look for Southwest’s costs to rise as the merger moves forward.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks mentioned here.
