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Airlines Thrive in Thinner Air
By Ted Reed
TheStreet.com Staff Reporter
5/15/2006 7:09 AM EDT
The airline industry is suddenly awash in good news.
Demand for seats is rising, while supply is falling. The historically profitable summer months are approaching. Southwest Airlines, which has kept fares down for all carriers, faces increasing cost pressure. Companies are talking about paying down debt. A handful are even making money.
During the first quarter, domestic fares rose 10.5% from a year earlier, while domestic capacity fell 4.1%, the Air Transport Association reports. Overall capacity fell 1.9%, after international increases. The positive trends cheered the Bear Stearns Global Transportation Conference in New York on Wednesday, even as high fuel costs continue to cast a pall over the industry.
Capacity restraint is probably the industry's biggest positive, although it is not entirely a result of the airlines' strategic thinking. "The capital markets aren't as excited about airlines as they were some years ago," Gerard Arpey, CEO of AMR, told the conference. "Therefore, there is capacity restraint in this industry, [which] is leading to the environment we have today."
Added Derek Kerr, CFO of US Airways Group: "The reason it's working in the industry right now is really capacity. As capacity comes down, RASM (revenue per available seat mile) is increasing."
The closely followed measure will likely be in the 12% to 15% range for the second quarter, Kerr said, but could slow afterward as comparisons with 2005 become less favorable. US Airways was a first-quarter leader in RASM growth, Kerr said, because the 2005 merger of the former US Airways with America West Airlines led to reduced capacity, network synergies and strong pricing comparisons with the cash-starved former US Airways.
AirTran Holdings in particular benefits from capacity reductions by competitors, said President Bob Fornaro. Pulldowns by Delta Air Lines and US Airways are fueling RASM growth on connecting flights to Florida and throughout the East Coast, he said. AirTran's presence in Detroit and Flint means it is also benefiting from pulldowns by Northwest Airlines, which said Wednesday that it reduced first-quarter capacity by 10%, cutting its fleet to 367 planes from 432 planes.
Reduced capacity means "we're starting to see some pricing power," Fornaro said. "There's been no pricing power the last five years." On a conference call Monday, UAL's executive vice president, John Tague, said that United proposed 16 major domestic fare increases in the first quarter. Six were matched by competitors. United also introduced dozens of international and "tactical" increases, Tague said.
Improved pricing prompted AirTran on Wednesday to raise its second-quarter RASM to a range between 13% and 16%, up from 12% to 14%. Analysts had expressed disappointment at the earlier guidance. Better revenue also means that American, which has $4.8 billion in cash, has "begun to chip away" at its $20 billion debt load, Arpey said. And Alaska Air Group, like US Airways and Southwest, had a profitable first quarter. "We're the most seasonal of the larger airlines," said CFO Brad Tilden. "It's not uncommon for us to dig a bit of a hole in the first quarter, (so) it's very gratifying to start the second quarter with money in the bank."
Another positive for the industry is that Southwest, for a long time the 500-pound pricing gorilla, seems more prone to raise fares as its fuel hedges expire and perhaps less prone to chew up its competitors. "It's definitely having a huge effect on the industry," US Airways' Kerr said. "They're the only airline that really prices to their cost, [and] that kept pressure on the industry."
Kerr noted that Southwest "tried to run US Airways out of Philly, until we produced a transaction that was strong and had lots of cash -- then they backed off in Philly.
Meanwhile, Frontier Airlines CFO Paul Tate said that Southwest "has a problem on the labor side (because) their cost per pilot is much higher than anybody else's in the industry." Tate dismissed the perception that Frontier was badly hurt when Southwest began flying to its Denver hub in January. Frontier RASM grew by 6.8% in April, after rising just 1.9% in the first quarter.
Despite the good news, it is clear that pricing has not caught up with high fuel costs. Fuel costs rose 28% in the quarter, the ATA said. "We're going to have to figure out how to take that cost and pass it on or we're not going to be in business," Arpey said. "Recent results would indicate we're still not doing a very good job."
By Ted Reed
TheStreet.com Staff Reporter
5/15/2006 7:09 AM EDT
The airline industry is suddenly awash in good news.
Demand for seats is rising, while supply is falling. The historically profitable summer months are approaching. Southwest Airlines, which has kept fares down for all carriers, faces increasing cost pressure. Companies are talking about paying down debt. A handful are even making money.
During the first quarter, domestic fares rose 10.5% from a year earlier, while domestic capacity fell 4.1%, the Air Transport Association reports. Overall capacity fell 1.9%, after international increases. The positive trends cheered the Bear Stearns Global Transportation Conference in New York on Wednesday, even as high fuel costs continue to cast a pall over the industry.
Capacity restraint is probably the industry's biggest positive, although it is not entirely a result of the airlines' strategic thinking. "The capital markets aren't as excited about airlines as they were some years ago," Gerard Arpey, CEO of AMR, told the conference. "Therefore, there is capacity restraint in this industry, [which] is leading to the environment we have today."
Added Derek Kerr, CFO of US Airways Group: "The reason it's working in the industry right now is really capacity. As capacity comes down, RASM (revenue per available seat mile) is increasing."
The closely followed measure will likely be in the 12% to 15% range for the second quarter, Kerr said, but could slow afterward as comparisons with 2005 become less favorable. US Airways was a first-quarter leader in RASM growth, Kerr said, because the 2005 merger of the former US Airways with America West Airlines led to reduced capacity, network synergies and strong pricing comparisons with the cash-starved former US Airways.
AirTran Holdings in particular benefits from capacity reductions by competitors, said President Bob Fornaro. Pulldowns by Delta Air Lines and US Airways are fueling RASM growth on connecting flights to Florida and throughout the East Coast, he said. AirTran's presence in Detroit and Flint means it is also benefiting from pulldowns by Northwest Airlines, which said Wednesday that it reduced first-quarter capacity by 10%, cutting its fleet to 367 planes from 432 planes.
Reduced capacity means "we're starting to see some pricing power," Fornaro said. "There's been no pricing power the last five years." On a conference call Monday, UAL's executive vice president, John Tague, said that United proposed 16 major domestic fare increases in the first quarter. Six were matched by competitors. United also introduced dozens of international and "tactical" increases, Tague said.
Improved pricing prompted AirTran on Wednesday to raise its second-quarter RASM to a range between 13% and 16%, up from 12% to 14%. Analysts had expressed disappointment at the earlier guidance. Better revenue also means that American, which has $4.8 billion in cash, has "begun to chip away" at its $20 billion debt load, Arpey said. And Alaska Air Group, like US Airways and Southwest, had a profitable first quarter. "We're the most seasonal of the larger airlines," said CFO Brad Tilden. "It's not uncommon for us to dig a bit of a hole in the first quarter, (so) it's very gratifying to start the second quarter with money in the bank."
Another positive for the industry is that Southwest, for a long time the 500-pound pricing gorilla, seems more prone to raise fares as its fuel hedges expire and perhaps less prone to chew up its competitors. "It's definitely having a huge effect on the industry," US Airways' Kerr said. "They're the only airline that really prices to their cost, [and] that kept pressure on the industry."
Kerr noted that Southwest "tried to run US Airways out of Philly, until we produced a transaction that was strong and had lots of cash -- then they backed off in Philly.
Meanwhile, Frontier Airlines CFO Paul Tate said that Southwest "has a problem on the labor side (because) their cost per pilot is much higher than anybody else's in the industry." Tate dismissed the perception that Frontier was badly hurt when Southwest began flying to its Denver hub in January. Frontier RASM grew by 6.8% in April, after rising just 1.9% in the first quarter.
Despite the good news, it is clear that pricing has not caught up with high fuel costs. Fuel costs rose 28% in the quarter, the ATA said. "We're going to have to figure out how to take that cost and pass it on or we're not going to be in business," Arpey said. "Recent results would indicate we're still not doing a very good job."
