All Eyes on Airlines: Here’s What to Expect From Earnings
Airlines faced a steep downturn across the board after the financial crisis in 2008. Major carriers have been cutting costs and hiking ticket prices in order to return to stability in a notoriously expensive industry. All eyes are focused on next week, when earnings for American Airlines (AAMRQ.PK) and Southwest Airlines (NYSE:LUV) will be reported. Profits are expected to be in the green, but deeper problems point to slowing growth.
Carriers have pulled in a few extra dollars by increasing ticket prices. However, following a similar announcement from Delta (NYSE:DAL), United Airlines (NYSE:UAL) announced on October 11 that it rolled back a $4-$10 increase on many domestic, round-trip flights. This marks only four successful fare increases this year out of 12 attempts, according to JPMorgan analyst Jaime Baker. Price hikes are only successful if carriers unilaterally accept and apply them. Even small savings will drive consumers to change airlines, and competitors will take advantage of each others’ price hikes to claim market share.
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The United States Bureau of Transportation Statistics reports that as of September 12, Airlines had pulled in a record $1.7 billion in baggage fees in the first two quarters of the year. Third-quarter numbers, which benefit from late summer travel, are traditionally strong. Coming off these numbers, all five major U.S. airlines are expected to report profits, according to Reuters.
Airlines have also been pulling out every cost-cutting play in the book. Southwest merged with AirTran and officially became a single carrier in the first quarter of 2012. The consolidation of fleets and infrastructure will reduce overhead for the airline, and is expected to lead to lower ticket prices in the future.
Delta made headlines when it announced in April that it would be buying an oil refinery. Fuel prices account for a huge amount of airline costs, and the acquisition is expected to save Delta $300 million per year. According to a press release, “Production at the refinery combined with multi-year agreements to exchange gasoline, diesel, and other refined products from the refinery for jet fuel will provide 80 percent of Delta’s jet fuel needs in the United States.”
US Airways (NYSE:LCC) has had a strong year to date. Shares have gained nearly 120 percent, claiming customers by increasing its on-time arrival numbers. Industry observers think that the future holds a merger between US Air and American Airlines.
Airlines have cut back on the number of routes they fly, and slashed unprofitable routes entirely, but fears of higher fuel prices and general decrease in demand still loom over the industry’s head. Third-quarter profits will mean that carriers have figured out how to survive through a tough economic period, but are no guarantee of stability moving into the future.