Recovery gives airlines a summer lift

Remember when pigtailed Dorothy, her trio of friends, and dog Toto danced happily out of the woods as they saw the Emerald City in the Land of Oz come into view? It looked like the end of their troubles was near. Little did they know what still lay ahead.

Like Dorothy, the domestic airline industry is coming out of the woods, too, analysts say. After a first quarter of record losses, ''a recovery has begun,'' comments Eliot Fried, who follows the airlines for Shearson/American Express.

But the industry isn't ready to click its heels and return ''home'' to ongoing profitability yet. ''The recovery is certainly going to last through the summer. . . . The next test will be the latter part of September,'' warns Robert Joedicke, an analyst at Lehman Brothers Kuhn Loeb Inc.

That's when summer traffic will have peaked and the airlines will be back to relying on business travelers. If the economy has not rebounded with enough strength to put more of those travelers in the air by then, the danger could be another round of fare wars - an enormous drain on profitability. ''There is a big question mark as to what will happen in the off-season,'' comments Mark Daugherty, an industry analyst at Dean Witter Reynolds.

While carriers such as Pan Am, finally operating with a positive cash flow, have begun to feel upbeat about the future, not everyone is singing a lighthearted song now. Eastern Airlines last week reported record losses for the first six months of this year, and on Friday, Trans World Airlines joined them with a $108.9 million loss. Republic is turning to workers for concessions again , anticipating over $100 million in losses for its first half.

But for the industry as a whole, the summer looks good, says George James, senior economist at the Air Transport Association of America (ATA). In the next two weeks, second-quarter figures should be rolling in from the airlines.

''They may be able to be nominally profitable in the second quarter (compare that with a $650 million operating loss in the first quarter), and I expect the third quarter will be better,'' Dr. James says. ''After three record-loss years, we expect between $200 million and $800 million in operating profit for 1983.'' (Jesse Liebman, vice-president for planning and forecasting at TWA, calls $800 million ''wildly optimistic.'')

The improving economy, more stable fares, a drop in fuel prices, and industrywide cost cutting are major factors in the airline recovery, executives and analysts point out.

''The economy has turned around to such a point that people are interested in traveling again,'' says Robert Gibbons, spokesman at Republic Airlines. According to the ATA, traffic for the first six months of this year was up 6.8 percent from the same time last year.

But increased ridership means nothing if fares are deeply discounted - as they were in the first quarter of this year. This is why executives are so cheered by the year-to-year traffic improvement that has occurred so far this summer - despite disappearance of wholesale fare slashing. ''They are getting traffic at higher fares,'' Mr. Daugherty of Dean Witter confirms.

''This is going to be a better summer than last summer, and we hope that yield will continue to improve,'' says United Airlines spokesman Chuck Novak. Yield is the amount passengers pay per mile flown, which is what really counts when evaluating airline recovery.

While overall yield in the industry still hasn't caught up to last summer's level, the gap is getting smaller and smaller. ''With demand firmed up and yields improving, we are not quite back to year-earlier levels,'' comments Alfred Norling, a Kidder, Peabody & Co. analyst, ''but it's a vast improvement over the first quarter.'' Yield should improve further this summer, because in July most airlines stopped a 20 percent, no-strings-attached discount on the coach fare.

Talk of small fare increases has also rumbled through the industry. Eastern planned a 5 percent increase in fares last week, but when Delta decided not to go along with it, the airline gave it up. Eastern now hopes to push through a 3 percent increase in August. And many of the major carriers are hoping to slightly increase their discount fares in August, with United and TWA expecting to move discount fares up by $20. This is the industry's way of taking advantage of their peak season, analysts explain. ''You don't see Macy's giving a sale before Christmas,'' Mr. Joedicke, the Lehman Brothers analyst, says dryly.

Analysts say bankruptcies that may have been looming on the horizon in January are no longer a probability - at least for now. The recovery helped, but so did the stock market.

In a bull market that has had investors hoping to cash in on struggling industries that will eventually gain strength, airline stocks have been attractive this year. Since January, the industry has been able to raise $2.2 billion through public stock offerings, says Mr. Joedicke. With ''the striking exception of Delta,'' he says, ''almost everybody'' has gone to the stock market for financing.

For example, Pan Am had two offerings this year, bringing in $250 million to them out of the cloud of bankruptcy.''

This influx of capital will help the weaker airlines ''tide themselves over'' as they continue to battle overcapacity in the industry, competition from newcomers, labor disputes, operating problems, and inefficient planes, says Mr. Daugherty of Dean Witter. For the stronger airlines, he adds, it will lead to expansion and stepped-up orders for new aircraft.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK