For large airlines, America's skies getting friendlier

Profits are up for the big carriers for the first time since 9/11, but so are fares.

A host of small strategies have yielded one big turnaround for the long-troubled US airline industry.

They've forged alliances, cut back on flights, and skimped on peanuts. They've subtracted benefits for unionized workers and added a few feet to their wingspan with fuel-conserving "winglets."

The result: The major US carriers are now beginning to turn a profit, collectively, for the first time since the 9/11 terrorist attacks.

The return of profits doesn't guarantee smooth skies ahead, but it does mark an important milestone for companies such as United Airlines, American Airlines, and US Airways.

"The airlines have made tremendous progress," says Vaughn Cordle, an industry analyst at Airline Forecasts in Washington. The industry "is on the cusp of a major recovery."

How far it goes will depend on several factors, including the economy, the price of oil, and whether the airlines can avoid revisiting the mistake of expanding service too much in good times.

But for now, those long-awaited good times are here.

Despite soaring fuel costs, the industry posted a collective profit of about $1.5 billion, pretax, for the months from April to June, according to the investment firm Merrill Lynch in New York.

United Airlines, which a year ago was in bankruptcy proceedings, announced quarterly earnings of $119 million this week, following even larger gains at US Airways ($305 million), American ($291 million), and Continental ($198 million).

Two other big firms, Northwest Airlines and Delta Air Lines, have yet to report results because they are now in bankruptcy.

But the theme is clear. The old-line carriers suddenly have numbers that aren't that different from the newer, low-cost airlines that have been eating away at their market share since the industry was deregulated in 1978. Southwest Airlines, long the nemesis of the other big carriers, posted a second-quarter profit of $333 million.

Some analysts expect the strong financial performance to last well into next year.

For consumers, the news has a bittersweet edge. Fares have climbed on many routes, planes are more crowded, and a hot meal is something you buy in the airport before the flight.

The industry has benefited from government aid provided in the wake of the market disruption of 9/11. But they are benefiting now from strategic choices of their own. Many are emphasizing more-profitable international routes. And they have cut back domestic service, focusing on cities less served by low-cost rivals.

But analysts say a return to financial health is something the industry desperately needs. The recent progress, they say, may not be enough.

"It's not clear that an airline like United can continue to make a profit when demand declines, and as carriers like Southwest and JetBlue continue to add capacity," says Robert Shumsky, an expert on airline operations who teaches at Dartmouth College's Tuck School of Business in Hanover, N.H.

Indeed, the industry is heavily affected by economic cycles and oil prices.

In the past year, passengers have been able to afford fare hikes and fuel surcharges, and have accepted them as a necessary consequence of oil prices above $70 a barrel.

If fuel prices spike further or the economy enters a recession, the industry could come under pressure again and undergo more mergers, downsizing, and even outright failures.

Northwest, now in bankruptcy, faces the threat of a strike by flight attendants, as early as this month. On Monday, the flight attendants rejected a proposed contract that cut pay and benefits sharply.

"Labor costs are still the largest single factor in airline operations," Dr. Shumsky says. "To have long-term reductions in labor costs means not just slashing wages but also finding ways ... to make your labor more efficient."

Michael Linenberg, an analyst at Merrill Lynch, argued recently that investor gains may now be mostly behind them. But for the airlines, the good times could last a while.

"The current up-cycle could be extended at least another year," he wrote recently. Factoring out the impact of high fuel costs, he says profit margins on operations "are similar to the peak margins enjoyed in the mid-1960s when airline stocks were 'must hold' names."

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