Airlines to report record 3d-quarter earnings

October 22nd, 2010 by Staff

Source: The Philadelphia Inquirer — Airlines are poised to report record third-quarter earnings Wednesday, and the biggest profit in three tough years for the industry.

Passenger demand and corporate travel are stronger than a year ago. Fares are higher, while the number of seats – capacity – remains tight.

Airlines are getting revenue from added fees for checked bags, pillows, ticket changes, and choice seating.

US Airways Group, Delta Air Lines, and American Airlines will kick off earnings results Wednesday, and Southwest Airlines Co., United, and Continental Airlines will follow on Thursday.

“It’s going to be very difficult for them not to make money, given the way the numbers are all coming together,” said airline analyst Bob McAdoo with Avondale Partners L.L.C.

This is a remarkable turnaround from two years ago when survival of many airlines was at risk because of skyrocketing fuel costs and later the recession that decimated air travel, especially lucrative business travel.

Michael Linenberg, an analyst with Deutsche Bank Securities, estimates airlines as a group will report $2.3 billion in net income in the latest quarter, while analyst Michael Derchin of CRT Capital Group L.L.C. projects a profit of $2.4 billion.

Derchin, in a client note, said he expected major carriers to be profitable in the fourth quarter as well.

“The last time the industry had a profitable December quarter was 2000,” he wrote. “We attribute the dramatic change in fortunes to the capacity and financial disciplines exhibited by management in recent years.”

US Airways was the first airline in 2005 to “show the industry” that by cutting capacity – the number of seats flown – airlines could be profitable, said McAdoo.

“When America West took over US Airways, in bankruptcy for the second time, in 2005 they cut almost 20 percent of the capacity out of that airline,” McAdoo said. “The company went from being almost extinct to having the best margins in the industry in a matter of about six months.”

Eventually, all airlines drastically cut capacity as air travel dried up due to the economy in 2008 and 2009.

“When you keep a lid on capacity, and don’t have a bunch of extra flights that are half full, or full with people you had to virtually give the seats away to, then that will pay the bills,” McAdoo said.

Analysts surveyed by

Thomson Reuters expect US Airways to report a profit of $1.16 per share on revenue of $3.18 billion. US Airways has said that it expects to post a profit for the full year.

US Airways has no fuel hedges – contracts to buy fuel in advance. That saved money this year, but if oil prices shoot up again, to mid-2008 levels of $147 a barrel, airlines without some fuel hedged will be hurt.

Analysts will be listening on investor calls with airline executives for fourth-quarter guidance and announcements about 2011 capacity plans.

“We expect most managements to reiterate optimism on the revenue front, particularly regarding their highest-yielding corporate customers,” Kevin Crissey, analyst with UBS Securities L.L.C., said in a client note.

Glenn Engel, analyst with Bank of America Merrill Lynch, said in a report that “airlines are squeezing more utilization out of existing planes, and also benefiting from fewer cancellations.”

Wall Street is concerned that capacity growth will creep up and carriers will add more flights and airplanes, thus putting too many seats in the air to sustain profitability.

“We cannot ignore concerns that a return of revenues will embolden enough airlines to add capacity that, as has historically been the case, they seize defeat from the jaws of what otherwise might feel like victory,” wrote James Higgins, an analyst with Soleil Securities.

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