Fare wars fade-out, increase in passengers please airlines
After sputtering along on the runway during the first half of the year, airline profits have begun to lift off -- and stock investors have been quick to take the cue. The Dow Jones transportation index posted a 43.12-point gain last week, largely because airline stocks appear to have revived from their doldrums. Carriers are enjoying stronger passenger traffic and higher fares. (Along with the rest of the market, however, the transportation index was lower at midday Monday.)
Profits languished in the first six months of the year, mainly because of declining yields brought on by fare wars and having fewer passengers.
But a number of things, such as a low percentage of empty seats this month and last, the possibility of continued low fuel costs, and a slight rise in fares, have combined to reinterest investors, analysts say.
Trouble at People Express, too, has spurred some investors who think People's demise would help industry profits.
``When companies like People Express experience difficulty, it makes certain select airlines valuable,'' says Barry Gordon, an analyst with National Aviation and Technology Corporation, a mutual fund.
``Airlines are very big cash generators, and although many of them have high depreciation costs on the order of $500 million to $600 million, those are merely paper losses.''
On the other hand, says Mr. Gordon, ``People Express doesn't own most of its aircraft, so their losses are real losses.''
People Express, which is struggling to remake itself in the image of standard, full-service airlines, is not the cost-lowering force in the industry it used to be. That fact, plus the prospect of bankruptcy staring the struggling airline in the face, is a consideration not lost on those who feel that the fewer discounters eating into profits, the better it is for the airlines.
People Express reported a $74.5 million loss for the second quarter of the year and still has not completed sale of its money-losing Frontier Airlines subsidiary to United Airlines. It needs the cash to bankroll losses until it can be revived, analysts say.
Fear of terrorism has also waned, and overseas travel has finally begun to pick up. Trans World Airways chairman Carl Icahn told his stockholders last week that terrorism had cost the airline ``hundreds and hundreds of millions'' of dollars.
But he predicted a third-quarter profit -- its first in more than a year -- because of increased overseas bookings and lower labor costs. TWA lost $256 million in the first half of the year.
Some airlines are really flying -- with an average of more than 70 percent of their seats filled. That has helped airlines keep fare prices up a bit and increased the yield per passenger-mile traveled. Fare battles are not usually as ferocious during periods of strong demand.
Added to the optimism is expectation that the Organization of Petroleum Exporting Countries' new production agreement won't hold long enough to boost fuel costs permanently. The industry's jets will burn about 11 billion gallons of fuel this year. Every penny the price goes down saves the industry about $110 million, Gordon says.
But analysts are divided on whether a strong showing in the second half of the year will be enough to compensate for the first half and might even leave the industry in the black for the year.
The industry overall could revive enough to be about $1 billion in the black, says Gordon. But not everyone is that optimistic.
``The summer is historically a strong period,'' says Marilyn McKellin, an analyst with Value Line Investment Survey.
``They [airlines] have to make it during this period. Of course, the key indicator is what happens after Labor Day. Frankly, I don't think they can make up the first-half losses.''