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By David Bailey
CHICAGO, July 11 (Reuters) - The bad news dogging airlines should continue
next week when the largest U.S. carriers are expected to post $1.4 billion
in total quarterly losses with scant hope for industrywide profits before
2004.
Airlines have well telegraphed a slowing rate of revenue recovery following
the Sept. 11 attacks and the main focus in the earnings reports beginning
Tuesday will be on revenue and travel demand forecasts for the second half
of this year.
After the attacks, revenue per available seat mile, a key gauge of financial
health, rebounded steadily until April, when it reversed direction and
showed a greater year-on-year decline -- 12.8 percent -- than the 10.6
percent drop in March.
"The rate of recovery has slowed to a woefully inadequate
pace," said Jamie Baker, airline analyst at JP Morgan. "First
and foremost, we are most interested in hearing what carriers
can do, if anything, to improve the weak revenue environment."
JP Morgan expects industry losses of $1.4 billion in the second quarter and
$4.7 billion in 2002, compared with a $6.2 billion loss last year, Baker
said.
The slow rate of recovery makes industry losses of up to $1 billion
increasingly likely in 2003 and even that may be optimistic if business
doesn't pick up early next year, Baker said.
As a group, the eight largest U.S. carriers have lost record amounts of
money in the travel downturn that followed the Sept. 11 attacks and was
worsened by a decline in corporate travel that started months before.
The American Stock Exchange airline index (XAL) fell 33 percent in the
second quarter and dropped to near lows hit initially following the Sept. 11
attacks.
DOMESTIC REVENUE TEPID
Revenue has rebounded most quickly in Asian routes with some improvement in
Atlantic markets, analysts said. However, the enormous U.S. domestic market
has trailed other regions on very tepid demand.
Fares are at 15-year lows, according to American Airlines, the world's
largest carrier and a unit of AMR Corp. (AMR)
"There is a definite fare problem so if they don't raise fares, I don't see
how anything changes," Buckingham Research Group analyst Helane Becker said.
"It is not sufficient to say that an economic recovery is going to bail the
industry out."
Once again, Southwest Airlines (LUV) is the only airline among the eight
largest expected to report a profit in the second quarter. Dallas-based
Southwest, the No. 7 U.S. carrier, has reported a profit in each quarter
since the attacks, bucking the trend thanks to its low labor costs.
The second and third quarters are typically the most profitable for
airlines, making the third quarter the most likely period where major U.S.
carriers other than Southwest might report their first profits since the
attacks.
Analysts expect Continental Airlines (CAL) to be among the first major
carriers to report a return to profitability. Continental, the Houston-based
No. 5 U.S. carrier, reportedly made a small net profit in June, though not
for the quarter.
Northwest Airlines (NWAC), the Eagan, Minnesota-based No. 4 U.S. carrier,
may report a third-quarter profit based on current conditions that include
strong recovery in Asian routes, analysts said.
But select gains among individual carriers won't offset losses for the rest
of the year.
VEXING ISSUES
With "awful" results expected, investors will look at how well the industry
handles the vexing issues of capacity versus demand, labor tensions and
available cash, Lehman Bros. analyst Gary Chase said in a research note.
Both Arlington, Virginia-based US Airways Group Inc. (U) and UAL Corp.'s
(UAL) United Airlines are negotiating with their labor unions to cut costs.
US Airways, the No. 6 U.S. carrier, won conditional approval late Wednesday
for federal backing of $900 million in government loans.
United, based in Elk Grove Village, Illinois, just recently applied for
twice that much in loan guarantees. United has reached cost-cut agreements
with pilots and managerial staff, but machinists and flight attendants have
rejected cuts.
The focus will also turn to increased insurance costs to cover war risks and
there have been signs that major carriers may be willing to narrow the wide
gap between leisure fares and business fares, analysts said.
Carrier Thomson First Call Consensus EPS
Q2 2002 YR Ago
AMR Corp. (AMR) ($2) ($0)
UAL Corp ($7) ($5)
Delta Air Lines Inc. ($1) ($1)
Northwest Airlines Corp. ($1) ($0)
Continental Airlines ($0) $0.74
US Airways Group Inc. ($3) ($0)
Southwest Airlines Co. $0.11 $0.22
America West Holdings Corp. ($0) ($0) designates loss
©2002 Reuters Limited.
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