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From today's Wallstreet Journal [FONT=times new roman,times,arial]
January 2, 2007 [/FONT]
Return to Profit Has Wings
After Massive Losses
[FONT=Times New Roman,Times,Serif]Spoilers Could Emerge
Amid Fragile Recovery;
The Merger 'Wild Card'[/FONT]
[FONT=times new roman,times,serif][FONT=times new roman,times,serif]By SUSAN CAREY
January 2, 2007; Page C5[/FONT]
[/FONT]
The nation's largest airlines are ready to report their first annual profit since 2000, despite a dab of red ink that may seep into 2006's fourth-quarter earnings reports, due this month.
This year could be even stronger, analysts say, if the economy doesn't weaken, fuel prices stay where they are and airlines don't add too many seats.
IN SUMMARY
• The News: For airlines, a profitable 2006 and possibly a stronger 2007.
• The Background: The industry finally rebounds from huge post-9/11 losses.
• What's Next: Mergers could alter the industry landscape.
All bets are off, though, if one or more potential airline mergers manages liftoff.
"Consolidation certainly looks like the true wild card," says Philip Baggaley, a Standard & Poor's Corp. airline analyst. US Airways Group Inc. Chief Executive Doug Parker sprang an unsolicited bid on Delta Air Lines Inc. in November, while UAL Corp.'s United Airlines has had exploratory talks about a combination with Continental Airlines Inc.
Any single deal would probably trigger reactionary transactions as big carriers seek to keep pace. While mergers please potential investors because they could reduce industry capacity, they also initially could pile on additional costs and debt, which would hurt earnings.
Of course, any combinations would have to pass antitrust muster with the Justice Department, whose approval is hardly assured. For that and other reasons, the merger movement could fizzle.
"Without consolidation, 2007 would be the first normal year in a long time," Mr. Baggaley says.
U.S. airlines have finally turned around their finances after losing a cumulative $35 billion -- excluding bankruptcy-restructuring charges -- between 2001 and 2005. In 2005 alone, the carriers lost $5.7 billion.
The Air Transport Association, a trade group whose members carry more than 90% of U.S. passenger and cargo traffic, expects the industry to post 2006 earnings of $2 billion to $3 billion, possibly topping 2000 profit of $2.5 billion.
The group forecasts 2007 profit of $4 billion, which would be the best year since the 1999 earnings zenith of $5.4 billion. The 2007 forecast assumes that jet fuel retreats to $1.80 a gallon from more than $1.90 this year and that gross domestic product expands by 2.5% to 3%, more than airlines' estimated 2.5% increase in capacity.
Others expect the GDP growth rate to climb 2.4% to 2.6%.
Evidence of the recovery began emerging when most of the big carriers posted strong second- and third-quarter profits despite exceptionally high fuel prices. But the turnaround remains fragile, and most large airlines are loaded with debt.
"Two profitable quarters in a row can barely put a dent in the damage that we have absorbed in the past several years," Tom Horton, chief financial officer of AMR Corp.'s American Airlines, said at an investor conference last month.
Nevertheless, the buoyant economy and expansion in international markets have enabled carriers to push up fares to help offset higher fuel expenses. A $5 one-way domestic price increase during the week of Dec. 25 was the 10th successful industrywide effort to raise fares in 2006, says J.P. Morgan airline analyst Jamie Baker.
Analysts expect planes to continue to fly packed in 2007, given the shrinkage of the U.S. fleet over the past several years and continuing strong demand. In the 11 months through November, the leading airlines flew with an unprecedented 80.1% of their seats filled, up from 78.6% in the same period of 2005.
And now that most of the largest airlines have spent five years cutting expenses and learning to fly more efficiently, they are better able to cope with the continuing U.S. expansion of discount carriers such as Southwest Airlines Co. Indeed, some of those budget airlines, namely AirTran Holdings Inc. and JetBlue Airways Corp., have reined in expansion plans because of high fuel costs, hoping slower growth will improve profitability.
Revenue comparisons could tighten in 2007, however. Growth in unit revenue -- what an airline collects for each passenger flown a mile -- has been slowing.
From September 2005 through August 2006, domestic unit revenue rose in the double digits each month versus a year earlier. The pace fell to 7.4% in September, 7.6% in October and 5.7% in November, according to ATA statistics for the six largest airlines plus Alaska Air Group Inc.'s Alaska Airlines.
Analysts expect US Airways, Southwest, JetBlue and AirTran to report fourth-quarter profits. But seasonally the quarter tends to be weak, and this one was marred by high fuel costs and service disruptions caused by wind and rainstorms in the Pacific Northwest and blizzards in Denver.
Alaska Air warned before Christmas that it expects to break even. Continental earlier gave guidance that has led some analysts to predict it will post a small loss.
AMR's American, the nation's largest carrier by traffic, had been expected to be profitable. But American issued a Dec. 22 investor update saying its costs would be slightly higher than expected, partly because it had to cancel 1,000 flights due to weather.
American also said its revenue growth would slow from year-earlier and previous quarters' rates, prompting some analysts to surmise the company may post a loss for the period instead of the consensus estimate of 32 cents a share of profit.
An AMR spokesman declined to comment on the loss forecasts.
United Airlines, which canceled 2,000 flights in the pre-Christmas blizzard in Denver and additional flights in a second storm to hit that city last week, still was expected to earn a fourth-quarter profit, according to analysts surveyed by Thomson First Call.
But J.P. Morgan's Mr. Baker said in a research note last week that he expected the effect of the first blizzard and its pressure on costs could push United into the red.
On Friday, United said it is "premature to detail the financial impact of the Denver storms."
Northwest Airlines Corp. and Delta, which remain in bankruptcy-court protection, are expected to report more losses mostly because of noncash reorganization items they must recognize as part of their restructurings. But for all of 2006, Northwest expects to report pretax profit, excluding bankruptcy items. Delta forecasts full-year operating income for 2006.
Both carriers plan to emerge from Chapter 11 in the first half of 2007, which would end a series of large airline bankruptcy-court protections that began after the Sept. 11, 2001, terrorist attacks.
Delta hopes its vision of emerging as a stand-alone carrier will find favor with its creditors instead of US Airways' hostile takeover bid, currently valued at $8.23 billion.
Northwest also is focused on existing as an independent. But the airlines' presence in court protection has added intrigue to consolidation speculation because marrying an airline in Chapter 11 can make it easier for the partner to jettison planes and leases.
Such combinations also could create opportunities for discount airlines to acquire assets such as gates, aircraft and landing slots that might have to be sold by the larger carriers to win antitrust clearance.
Analysts don't think mergers are a foregone conclusion, but neither do they see money as an obstacle.
"The capital markets will finance almost anything these days," says S&P's Mr. Baggaley. Airlines also could issue their own stock or attract new equity investment to help pay for deals.
Fewer, larger airlines could mean an initial reduction in industry capacity, which could benefit all the players by giving them more power to raise prices.
"We measure the value of consolidation by how much capacity is removed and how many hubs close," says J.P. Morgan's Mr. Baker.
Improved 2006 industry profitability had much to do with Delta and Northwest shrinking in bankruptcy, he said. But airline mergers have a sorry history of labor unhappiness, service lapses and ultimately higher costs, and many promised "synergies" never materialize.
Write to Susan Carey at [email protected]1
January 2, 2007 [/FONT]
Return to Profit Has Wings
After Massive Losses
[FONT=Times New Roman,Times,Serif]Spoilers Could Emerge
Amid Fragile Recovery;
The Merger 'Wild Card'[/FONT]
[FONT=times new roman,times,serif][FONT=times new roman,times,serif]By SUSAN CAREY
January 2, 2007; Page C5[/FONT]
[/FONT]
The nation's largest airlines are ready to report their first annual profit since 2000, despite a dab of red ink that may seep into 2006's fourth-quarter earnings reports, due this month.
This year could be even stronger, analysts say, if the economy doesn't weaken, fuel prices stay where they are and airlines don't add too many seats.
IN SUMMARY
• The News: For airlines, a profitable 2006 and possibly a stronger 2007.
• The Background: The industry finally rebounds from huge post-9/11 losses.
• What's Next: Mergers could alter the industry landscape.
All bets are off, though, if one or more potential airline mergers manages liftoff.
"Consolidation certainly looks like the true wild card," says Philip Baggaley, a Standard & Poor's Corp. airline analyst. US Airways Group Inc. Chief Executive Doug Parker sprang an unsolicited bid on Delta Air Lines Inc. in November, while UAL Corp.'s United Airlines has had exploratory talks about a combination with Continental Airlines Inc.
Any single deal would probably trigger reactionary transactions as big carriers seek to keep pace. While mergers please potential investors because they could reduce industry capacity, they also initially could pile on additional costs and debt, which would hurt earnings.
Of course, any combinations would have to pass antitrust muster with the Justice Department, whose approval is hardly assured. For that and other reasons, the merger movement could fizzle.
"Without consolidation, 2007 would be the first normal year in a long time," Mr. Baggaley says.
U.S. airlines have finally turned around their finances after losing a cumulative $35 billion -- excluding bankruptcy-restructuring charges -- between 2001 and 2005. In 2005 alone, the carriers lost $5.7 billion.
The Air Transport Association, a trade group whose members carry more than 90% of U.S. passenger and cargo traffic, expects the industry to post 2006 earnings of $2 billion to $3 billion, possibly topping 2000 profit of $2.5 billion.
The group forecasts 2007 profit of $4 billion, which would be the best year since the 1999 earnings zenith of $5.4 billion. The 2007 forecast assumes that jet fuel retreats to $1.80 a gallon from more than $1.90 this year and that gross domestic product expands by 2.5% to 3%, more than airlines' estimated 2.5% increase in capacity.
Others expect the GDP growth rate to climb 2.4% to 2.6%.
Evidence of the recovery began emerging when most of the big carriers posted strong second- and third-quarter profits despite exceptionally high fuel prices. But the turnaround remains fragile, and most large airlines are loaded with debt.
"Two profitable quarters in a row can barely put a dent in the damage that we have absorbed in the past several years," Tom Horton, chief financial officer of AMR Corp.'s American Airlines, said at an investor conference last month.
Nevertheless, the buoyant economy and expansion in international markets have enabled carriers to push up fares to help offset higher fuel expenses. A $5 one-way domestic price increase during the week of Dec. 25 was the 10th successful industrywide effort to raise fares in 2006, says J.P. Morgan airline analyst Jamie Baker.
Analysts expect planes to continue to fly packed in 2007, given the shrinkage of the U.S. fleet over the past several years and continuing strong demand. In the 11 months through November, the leading airlines flew with an unprecedented 80.1% of their seats filled, up from 78.6% in the same period of 2005.
And now that most of the largest airlines have spent five years cutting expenses and learning to fly more efficiently, they are better able to cope with the continuing U.S. expansion of discount carriers such as Southwest Airlines Co. Indeed, some of those budget airlines, namely AirTran Holdings Inc. and JetBlue Airways Corp., have reined in expansion plans because of high fuel costs, hoping slower growth will improve profitability.
Revenue comparisons could tighten in 2007, however. Growth in unit revenue -- what an airline collects for each passenger flown a mile -- has been slowing.
From September 2005 through August 2006, domestic unit revenue rose in the double digits each month versus a year earlier. The pace fell to 7.4% in September, 7.6% in October and 5.7% in November, according to ATA statistics for the six largest airlines plus Alaska Air Group Inc.'s Alaska Airlines.
Analysts expect US Airways, Southwest, JetBlue and AirTran to report fourth-quarter profits. But seasonally the quarter tends to be weak, and this one was marred by high fuel costs and service disruptions caused by wind and rainstorms in the Pacific Northwest and blizzards in Denver.
Alaska Air warned before Christmas that it expects to break even. Continental earlier gave guidance that has led some analysts to predict it will post a small loss.
AMR's American, the nation's largest carrier by traffic, had been expected to be profitable. But American issued a Dec. 22 investor update saying its costs would be slightly higher than expected, partly because it had to cancel 1,000 flights due to weather.
American also said its revenue growth would slow from year-earlier and previous quarters' rates, prompting some analysts to surmise the company may post a loss for the period instead of the consensus estimate of 32 cents a share of profit.
An AMR spokesman declined to comment on the loss forecasts.
United Airlines, which canceled 2,000 flights in the pre-Christmas blizzard in Denver and additional flights in a second storm to hit that city last week, still was expected to earn a fourth-quarter profit, according to analysts surveyed by Thomson First Call.
But J.P. Morgan's Mr. Baker said in a research note last week that he expected the effect of the first blizzard and its pressure on costs could push United into the red.
On Friday, United said it is "premature to detail the financial impact of the Denver storms."
Northwest Airlines Corp. and Delta, which remain in bankruptcy-court protection, are expected to report more losses mostly because of noncash reorganization items they must recognize as part of their restructurings. But for all of 2006, Northwest expects to report pretax profit, excluding bankruptcy items. Delta forecasts full-year operating income for 2006.
Both carriers plan to emerge from Chapter 11 in the first half of 2007, which would end a series of large airline bankruptcy-court protections that began after the Sept. 11, 2001, terrorist attacks.
Delta hopes its vision of emerging as a stand-alone carrier will find favor with its creditors instead of US Airways' hostile takeover bid, currently valued at $8.23 billion.
Northwest also is focused on existing as an independent. But the airlines' presence in court protection has added intrigue to consolidation speculation because marrying an airline in Chapter 11 can make it easier for the partner to jettison planes and leases.
Such combinations also could create opportunities for discount airlines to acquire assets such as gates, aircraft and landing slots that might have to be sold by the larger carriers to win antitrust clearance.
Analysts don't think mergers are a foregone conclusion, but neither do they see money as an obstacle.
"The capital markets will finance almost anything these days," says S&P's Mr. Baggaley. Airlines also could issue their own stock or attract new equity investment to help pay for deals.
Fewer, larger airlines could mean an initial reduction in industry capacity, which could benefit all the players by giving them more power to raise prices.
"We measure the value of consolidation by how much capacity is removed and how many hubs close," says J.P. Morgan's Mr. Baker.
Improved 2006 industry profitability had much to do with Delta and Northwest shrinking in bankruptcy, he said. But airline mergers have a sorry history of labor unhappiness, service lapses and ultimately higher costs, and many promised "synergies" never materialize.
Write to Susan Carey at [email protected]1
