Rising fuel prices pushed major US airlines into the red for the first quarter and could pressure results during the peak travel season, but most carriers are likely to be profitable this year, analysts said.
While grappling with high fuel costs, carriers have merged, trimmed money-losing routes, raised ticket prices, and added charges for luggage and food to revive profits after the 2008-09 downturn. A rebound in corporate travel has bolstered the recovery.
“The question becomes how profitable” will they be, said Savanthi Syth, an analyst with Raymond James.
Airlines have shown discipline over the past year in cutting back flights to match demand and are sticking with other winning strategies.
“It’s an industry that is committed to recouping fuel price increases and an industry that’s in a better position to recoup fuel price increases,” Syth said.
Big US carriers will report first quarter results over the next few weeks, starting with Southwest Airlines on April 19. Analysts expect the biggest carriers to post losses. Southwest warned in early March that it would not post a profit for the period, citing high fuel prices.
Deutsche Bank analyst Michael Linenberg recently wrote that salary and wage costs will also pressure airlines and offset higher revenues in the first quarter, which is typically the industry’s weakest.
Still, he said, Delta Air Lines, which acquired Northwest Airlines in 2008 and has since cut costs and bolstered corporate business, would likely show improved operating margins.
Merger-related costs and issues led Southwest and United Continental to operating losses, he added. American Airlines parent AMR is operating under Chapter 11 bankruptcy protection.
PRICING POWER FACING BIG TEST
Fuel, which typically accounts for a third of an airline’s costs, remains a major wild card. Prices for US crude have fallen to the USD$103 a barrel range after peaking at USD$110 in March. International benchmark Brent trades at around USD$118 a barrel, down from its 2012 peak of just over USD$128 in March.
Even so, the pricing power that airlines have gained over the past year could face a big test this year if oil prices start rallying again and leisure passengers, who are already paying higher fuel prices, are charged more for airline tickets.
“Airlines have consistently raised fares over the last year and I think the concern is how much more can they increase them before they start affecting demand and fewer people start flying,” said Nima Samadi, senior airline analyst at market researcher IBIS World.
So far, leisure and business travel demand seems to be steady with prices at current levels, industry watchers said.
“Gas prices and airfare prices would need to move up even further than they are now to have a material impact on overall leisure demand this summer, whether it be flying or driving,” said Clem Bason, president of the Hotwire Group.
Business jet setters, who have driven overall travel demand over the past year, tolerate higher airfares more than leisure flyers, Bason noted.
“Business travel is generally more resilient than leisure travel, so unless fares begin to skyrocket beyond what’s already expected, business travel demand should remain consistent.”
AIRFARES HIGHER THAN YEAR AGO
US carriers have pushed through three successful fare increases this year out of five attempts, said Rick Seaney, chief executive of Farecompare. This compares with six fare rises in the same period a year ago.
“They’re having trouble pushing through hikes,” Seaney said. “Three out of five is pretty good for a baseball player, but not necessarily for airlines, especially when fuel goes up on them.”
Domestic air fares have risen about 5 percent so far this year and are up about 10 to 12 percent from a year ago, Seaney added.
Underscoring the significance of fuel to airlines, Delta is considering buying a ConocoPhillips refinery and may partner with JPMorgan Chase to help run it, a source familiar with the situation said last week.
Delta, which spent USD$12 billion on fuel in 2011, declined to comment on Monday.
Atlanta-based Delta has retired its least fuel-efficient planes, consolidated facilities and trimmed staff over the past year to cut costs and help its bottom line.
While a refinery deal may or may not come through, analysts said the potential Delta purchase shows the importance of fuel in airline profits, and how determined the industry is to find ways of grappling with it.
“It definitely illustrates what a big issue rising oil prices are for airlines and the lengths to which they are willing to go to try to provide themselves a little bit of protection and insulation,” Samadi said.