Airline losses could shrink

When the nation’s airlines report third quarter earnings beginning next week, two themes will dominate their stories: loss and hope.

On the one hand, the industry is expected to report a collective deficit as high as $400 million, putting it on pace to lose nearly $6 billion in 2003. But, analysts say, even a shortfall of that size would be much smaller than a year ago, earning the industry the right to feel slightly optimistic.

The industry’s financial situation these days is "pretty good compared to the last couple of years," UBS airline analyst Samuel Buttrick said.

Excluding the effects of one-time items, such as federal reimbursements for security costs, analysts believe the industry will report its first operating profit since the fourth quarter of 2000. And the perennially profitable Southwest Airlines is expected to be joined by Continental Airlines as the only other carrier that earned a net profit in the July-September period.

Many airline stocks remain below pre-Sept. 11 levels, but they have nonetheless soared in the past year due to confidence that the U.S. economy is recovering and that industrywide restructuring will eventually pay off.

Airlines no doubt got an extra lift this summer from leisure travelers who had postponed trips in the spring due to the war in Iraq, analysts said. With demand high, carriers were able to charge more.

Merrill Lynch airline analyst Michael Linenberg said the gradual improvement reflects better cost control. Blaylock &Partners airline analyst Ray Neidl said reducing extra capacity has begun to pay off. With smaller planes and less frequent flights, carriers are using their fleets more efficiently, he said.

Still, analysts say major carriers face several long-term obstacles, ranging from the rapid ascendance of low-cost rivals to high levels of debt.

The persistent stinginess of business travelers is also a problem, since this group of customers tends to purchase the highest-priced tickets available. While leisure travel demand was strong this summer, it has tapered off enough this fall that carriers have responded by lowering fares.

Reducing labor expenses still remains a priority. Delta Air Lines is making changes to flight attendants’ work rules in an effort to save $40 million a year, and bankrupt United Airlines is seeking government approval to postpone payments to employee pension plans, a move already made by Northwest Airlines.

"While third quarter results will be the best the industry has seen since 9-11, extreme fundamental challenges remain," Lehman Brothers airline analyst Gary Chase said.

With losses for 2001 through 2003 likely to total around $25 billion, the factors underlying major carriers’ woes are well known: a droopy global economy, terrorism, wars in Afghanistan and Iraq, and intense competition.

What is uncertain is whether airlines will remain disciplined about keeping costs down as revenues grow, several analysts said, cautioning carriers against rebuilding capacity too quickly.

The other serious concern is increased competition from low-cost rivals such as Southwest Airlines, JetBlue Airways and AirTran Airways, all of which have been profitable throughout the year. These carriers, along with Internet travel companies, have helped fuel the demand for cheap fares among leisure and business travelers alike.