Airline Industry Forecasts Clearer Skies

Cost cuts and restructuring help some airlines turn profitable

DESPITE storm clouds on the immediate horizon - including labor turbulence at United Airlines and a strike threat by flight attendants at American Airlines - the United States airline industry is looking further ahead to calmer skies.

``The good news is that cost-cutting measures under way are starting to have a favorable impact on the [airline] industry,'' says David Ulmer, a vice president with Roberts, Roach & Associates, an airline consulting firm in Hayward, Calif. ``Assuming that cost-control efforts continue, the industry should see a lot of improvement'' next year and in 1995. The industry sustained extensive financial losses in the late 1980s and early 1990s.

The industry ``is starting to show signs of health,'' in large part because of the continuation of ``major structural changes,'' says Rose Ann Tortora, an airline analyst with the investment house Donaldson, Lufkin & Jenrette Inc. Excess capacity has been slowly disappearing, with carriers canceling new aircraft orders and retiring older, less efficient planes. Moreover, low fuel costs worldwide and low interest rates in the US have provided a measure of financial stability.

Earnings results for the third quarter ending Sept. 30 were generally upbeat for the industry, although those results will not be enough to ensure an operating profit for most carriers for 1993, Ms. Tortora says. Many analysts assume that AMR Corporation (American) and Southwest Airlines will post profits this year. The outlook for other US carriers is ``more clouded,'' she says.

Major carriers showing profits for the last quarter include Alaska Air, America West, American, Delta, Northwest, United, and Southwest. Of those companies, only UAL Corporation (United) and Southwest posted profits in the same quarter in 1992. But fourth-quarter 1993 results are not expected to be strong, Tortora says, reflecting the slower travel season, despite heavy holiday traffic during the Thanksgiving and Christmas weeks.

USAir Group posted a loss of $178 million in the third quarter, up from a loss of $106 million in the same quarter in 1992.

``Summer is the mega-period for airlines, when the carriers make most of their money. Fall and spring are marginally profitable, but the end of the year is generally slow,'' which means that the industry will not get any added help on the profit equation in the weeks ahead, says Earl Gaskins, an airline analyst with Provident Capital Management in Philadelphia. Provident is an investment management service.

In recent weeks Wall Street's attention has centered on the struggle between United's management and its pilots and machinists' unions, who have sought to gain financial control of the carrier. The unions proposed a buyout package that they insisted was worth $165 a share. But United's advisers, First Boston Company, estimated that the offer was worth only $140 a share, well below the market value of United's stock, which stood at slightly over $148 a share late last week. United's management has insisted that it will move ahead with a number of controversial restructuring plans. The cost-control measures are expected to result in fewer jobs. The unions say they will block efforts that could scuttle large numbers of jobs.

United's struggle to gain control over costs - particularly its labor costs, analysts say - mirrors the long-range challenge for the industry. Expensive route systems make it difficult for the national carriers to compete with smaller regional ``no frills'' carriers, such as Southwest Airlines.

``Right now there is one US carrier that is consistently efficient and consistently profitable and that is Southwest,'' Tortora says. Southwest ``is showing the industry the way that it will have to go to be profitable.''

One factor that could hurt the industry would be a stronger-than-expected economic recovery, Tortora says. Fuel costs could climb back upward. Higher interest rates would also work against profitability.

Carriers with extensive international routes have been hurt by the sluggish world recovery, Mr. Gaskins says. Delta found that its heavy ``European commitment is not paying off,'' particularly its Frankfurt, Germany, run, he says.

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