Airline Weekly - August 8, 2011

Cover Story

Still Standing: Amid the doom and gloom, U.S. airlines are feeling pretty good

Like most Americans these days, Jeffery Smisek has no love for his country’s legislature. “Whenever Congress is in session,” United’s CEO said last month, “we’re always at risk.”

Well, good news Jeff. Just before leaving their last session, lawmakers left the FAA unable to collect ticket taxes, leaving airlines with a 16-day windfall worth roughly $500m. How significant is that? Let’s put it this way: $500m was about half of what all U.S. airlines earned combined last quarter in terms of net profits ex special items. A couple of carriers—Alaska and Spirit—saw a spike in bookings after passing the tax savings to travelers. Most like Delta, which said it was reaping $4m to $5m a day by holding fares constant and pocketing the uncollected tax money, essentially enjoyed the equivalent of a 17% drop in fuel prices for each day the FAA was shuttered. Southwest said it reaped $36m during the first ten days, implying a total gain of nearly $60m over the full 16 days.

Alright, so there are some drawbacks to not having a properly funded FAA for four years now. And airport improvement projects were delayed during the shutdown. But U.S. airlines, “taxed more heavily than alcohol, tobacco and firearms” according to Smisek, can’t be anything but pleased with their unexpected bounty.

Come to think of it, there’s a lot going right for U.S. airlines. During the second quarter, they (the 10 biggest airlines excluding regionals) collectively earned more than $1b ex special items and a solid 6% operating margin. That’s double the 3% managed by the eight European airlines that have reported so far. And it’s far better than the measly 1% recorded by the six East Asian airlines that have reported.

Their performance wasn’t quite as good as last year, when Q2 operating margin for the industry was 10% (matching Q2 of 2007). But it was certainly better than Q2 of 2008 and 2009, when U.S. airlines hovered around breakeven at the operating level and only managed that thanks to robust performance by LCCs, particularly in 2009. The... (360 of 1,440 words)

Also Inside this Issue:

Talk about a tumultuous week: Bad news in stock markets and debt markets, good news in job markets and oil markets—and another escalation of uncertainly in the airline business.

Ultimately, who knows? The current quarter could prove highly profitable, with energy prices down and capacity tight. For U.S. airlines, you can add a tax windfall too. But demand destruction can be lethal, and there’s hardly any assurance fuel prices won’t rise again. Not to mention, we’re still at $87 per barrel for WTI, not exactly airline paradise.

Paradise it wasn’t for Southwest, but it did mange a solid profit in the peak second quarter, despite its price-hike momentum running out of steam late in the period. But with AirTran now in tow, Southwest hopes for some pricing heft simply by not having to compete with it anymore.

Poor All Nippon has to compete with a Japan Airlines that looks like the “after” picture in an exercise commercial. Once tired and overweight, JAL is now trim, fit and making big money, despite the crisis in its home market. Not so for Air Canada, which still needs more dieting and exercise two years after a near-death experience. WestJet’s margins, by contrast, were once again excellent.

In Europe, Alitalia and Finnair both lost money, and in the ASEAN region, both Garuda and Tiger Airways suffered uncharacteristic operating losses (though Tiger’s losses stem from Australia). Copa did well as usual, Air Arabia weathered regional storms with relative ease and as for Air India? Well, let’s just say it reached for the Stars and missed.

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