Airline Weekly - July 28 , 2008
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Airline Weekly - July 28 , 2008

Blighted United: America’s third largest airline suffers an awful first half of 2008

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Blighted United: America’s third largest airline suffers an awful first half of 2008

When United CEO Glenn Tilton writes his memoirs for 2007 and the first half of 2008, he won’t need to borrow the title “From Worst to First” from ex-Continental CEO and author Gordon Bethune. Instead, he might want to use the title: From Pretty Good to Awfully Bad.

Last summer, United Airlines outperformed all of its Big Six peers except Northwest, measured by operating margins. During the third quarter alone, it had a higher operating margin than even industry superhero Southwest. Its first and fourth quarters weren’t quite so good—the carrier’s east-west oriented network tends to outperform the industry in the summer but underperform it in the winter. Still, United’s full-year 2007 operating margin was a solid 5%, better than that of its archrival American and just below the 6% achieved by America’s top ten airlines combined.

The first half of this year is a completely different story. Last week, it reported another dismal set of financial results that were far worse than those of any of the nine largest U.S. airlines. Operating margin excluding special items (and largely meaningless paper gains from future period hedges) was negative 6%, a full three points worse than Alaska Airlines and four points worse than US Airways and American. Net margin was negative 7%, also an industry worst and two points below runner-up American. All of this after a miserable first quarter, in which United’s operating and net margins, respectively, were negative 9% and negative 11%.

United’s struggles are striking because—on the surface at least—it has a lot of advantages: United has plenty of widebody planes to benefit from the recent longhaul boom (unlike Continental and US Airways, who wish they had more). Unlike American and Continental, it had a chance to restructure its costs in bankruptcy this decade. And unlike especially US Airways and to varying degrees its other competitors, United’s hubs are all first tier in their regions, and it is the dominant carrier at all of them (unlike even American, which plays second fiddle to United itself at Chicago O’Hare and Los Angeles).

What’s going on? In short, United has both a revenue and a cost problem.

In a world where every airline’s costs are growing because of soaring fuel prices, raising revenue is imperative, through expansion if possible or—more likely nowadays—by squeezing up fares through capacity cuts. United, however, grew revenues just 3% y/y (and passenger revenues even less than that) during the second quarter. That’s normally not bad considering that it cut capacity 1%—even... (432 of 1729 words)

Also Inside this Issue:

Is the oil crisis easing? Prices fell again last week, though $123 a barrel is not exactly cause for celebration. Still, downward trending fuel markets combined with mass capacity and cost cutting could make the third and fourth quarters a lot better financially than most expected. Before getting too excited, however, note that $123 oil is still more expensive that the average price—$121—during the second quarter.

During the April-to-June period, only three of the ten major U.S. airlines (Delta, Southwest and jetBlue) reported operating profits ex special items, with AirTran having not yet reported (it will do so Tuesday). On the opposite end, Alaska Airlines, US Airways and especially United all had rough second quarters. For the top nine U.S. airlines combined, operating margin was negative 1%, way down from positive 10% during the same quarter a year ago.

America’s 11th largest airline, meanwhile, had its best week in months. Frontier, battling for survival, managed to convince an investment fund to give it the money it needs to exit bankruptcy.

The week was much worse for Mexico’s Aerocalifornia, which lost its battle for survival when government officials forced it to stop flying. Lufthansa had a rough week, too, enduring a regional pilot strike and scrambling to avoid a much larger mainline flight attendant and ground worker strike that may occur this week.

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