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Airlines hope for fun in sun
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May 21, 1999: 10:10 a.m. ET
Analysts start to worry about whether high season will be good for carriers
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NEW YORK (CNNfn) - With the travel industry riding into its peak season on a high, the last thing airline investors wanted to hear was that spring sales were looking poor.
But that's exactly what brought them back to earth this week. The Air Transport Association, the industry trade group, reported April revenue per seat was down 3 percent, double what even pessimistic analysts expected.
Revenues are an early indictor of earnings, and even more so with airlines, which have high fixed costs. With hard second-quarter numbers from the airlines a few months off, the ATA's numbers are the first sign of how business is looking in the all-important spring and summer months.
Is this party over?
Airlines have raced through three great years, and the feeling is that can't go on forever. "Right now, everybody's looking for some kind of weakness," said Than Dinh, an aviation analyst with Avitas Inc. "This is the first really bad piece of news going in that direction."
Airline stocks tumbled this week. In the four trading days ended Thursday, shares of AMR -- the parent of American Airlines -- lost 8.2 percent, shares of United Airlines dipped 8.4 percent and Delta stock lost 4.6 percent.
So the question comes: Is Wall Street chicken little or is the sky really falling for the flight industry?
A lot to watch into the summer
Not surprisingly, the airline stocks rebounded Thursday. But they didn't regain their losses, and air stocks will be closely watched in the next few months. After a record $5.2 billion in net income for the major U.S. airlines in 1997 and profits only slightly below that in 1998, at $4.9 billion, the feeling is that 1999 will be a down year.
And airlines are important to watch not only for air investors but also as something of a leading indicator of economic strength. Leisure travel is largely a luxury item, so ticket demand gives early warning of the strength both of consumer's bank balances and their confidence.
Business travel matches skittishness with earnings. It trailed off in the fourth quarter of 1998, for instance, when economies were roiled worldwide and U.S. markets got choppy. CFOs started reining in expenses right away.
Two steps forward, one step back
But the airlines pushed through a 4 percent fare increase in the first quarter of '99, their first after a dozen failed attempts last year, according to Avitas. Because most passengers book in advance, those gains were expected to show up -- and still could -- in the next few months' revenue. That's why ATA's news was so disappointing.
Load factors, the way airlines measure how full their planes are, were good from January through April. The first-class cabins were 75 percent full and coach was close, at 68 percent, according to the ATA. Both numbers were up over the same period last year, with first-class travel the better of the two.
But analysts started lowering expectations on air stocks based on April revenue numbers because they took them to mean May would be as bad or worse despite the fare increase. Some said they didn't see sales improving over the next two to three months.
"The revenue numbers that came out [Tuesday] were a step back," said Glenn Engel, an analyst with Goldman Sachs. That followed two big steps forward after a poor end to 1998, when airlines saw their passenger mix get out of whack.
Leisure travel likely to drop
"The problem for the airlines over the last six months is the wrong guy has been flying," Engel continued. Not enough high-paying business travelers, too many cost-conscious leisure seekers.
That could change. With oil prices rising, airlines know they'll be paying more for fuel in the peak season, which will drive ticket prices higher. Last year, fuel costs were just 9.9 percent, well below the 11 to 12 percent norm.
Fare increases may have already started to make the leisure traveler balk. Another reason April's revenue was down was that Easter was early in the month, pushing the holiday travel season back into March.
Airline sales in troubled markets such as Asia have stabilized. But those markets haven't yet started to recover from the crises there, from the airlines point of view. If the U.S. economy starts to slow, the U.S. airlines won't have their strong home base to fall back on.
New breed takes margins over sales
For the rest of 1999, airlines may forgo some sales in an effort to shore up margins. That's a shift from a period when the airlines competed mostly by flooding routes with flights and cutting fares to gain market share from each other.
After the debacle of the early 1990s, when the joke was that the industry lost more in a few years than it had in all prior years combined, a new breed of airline executives has given up on fierce market-share competition. Instead they're focusing on maintaining strong margins and expanding slowly.
Leading that push is Gordon Bethune at Continental. The sixth-largest U.S. carrier saw essentially flat load factors for April. Despite strong revenue growth the first quarter, when sales increased 11 percent over the same period a year ago, it announced it was cutting its planned rate of growth.
It will now shoot to increase revenue by six percent in 2000 rather than the 9 percent it had been aiming at before, in an effort to keep margins at 10 percent.
Bethune's non-airline background is a big plus, according to Dinh, the analyst. "Now you see airline managers looking more at the bottom line." Still, Dinh cautions, the new breed "will be put to the test in this next downturn."
Actually Continental (CAL) and Delta (DAL), under CEO Leo Mullin, have run counter to the industry so far this year. Delta, the third largest carrier, said it is seeing strong bookings for spring and summer, and its revenue per seat mile -- how much money an airline makes transporting one passenger, one mile -- was up in April.
"Their revenue was up," Engel, the Goldman Sachs analyst pointed out. "I'm not sure why April was so weak." Logic points to the other major carriers: No. 1 United (UAL), No. 2 American (AMR), No. 4 Northwest (NWAC) and No. 5 US Airways (U).
AMR Corp.'s chief executive, Donald Carty, said Wednesday he wasn't surprised the industry's numbers were down, though he said he was talking about the industry and not his company's airline, American. Low fuel costs have helped the industry mask other rising costs such as labor, an American spokesman said.
United declined comment, other than to say its April traffic was fairly flat. "Capacity outstripped demand slightly," causing load factors to slip 1.9 percentage points, a spokesman said. It highlighted growth in the Pacific rather than domestically.
Outlying Southwest is upbeat
The story wasn't gloom and doom at low-price carrier Southwest Airlines, the only major airline that doesn't report to the ATA. It says its lower-cost, lower-price strategy makes it harder to compare operations with full-fare carriers.
"Quite frankly I was surprised to see those industry numbers," Chief Financial Officer Gary Kelly said. "That's not close to what we've experienced." Southwest's business vs. leisure mix has improved to roughly 45-55, he said, and sometimes nears 50-50.
Despite the rise in oil prices, Southwest (LUV) tied in deals for 75 percent of its second-quarter fuel demand that should keep its costs around 45 cents a gallon for the second quarter. That's the same as late last year.
Yes, oil prices increased this spring, taking jet fuel prices with them, he said. But they were "at an all-time low, for practical purposes." Adjusting for inflation, only 1978 was better.
Confidence game for rest of year
Load factors are higher than the industry used to expect a decade or two ago, as well. Regularly running flights at 70 percent full was considered the impossible dream.
The flipside of airlines' failure to make price increases hold last year was that ticket costs kept low, encouraging more spur-of-the-moment travel. High home values and a high stock market contributed to that.
But several of the trends that have kept airlines riding high are changing. "Traffic isn't going to be that strong in perpetuity," Dinh said. Airlines know higher oil prices are coming and, like Continental, they're starting to make contingency plans to keep growth in check.
The increased operating costs make it vital to their bottom line that airlines discover ways to up fares over the travel-heavy summer season. Right now, based on the April numbers, revenue doesn't seem to be keeping pace with costs. "If it's sitting flat, we're going to have real tough year over year comparisons," an ATA analyst said.
So the rest of 1999 depends on what both the leisure and particularly the business travel markets will take. If the stock market falters or interest rates rise, that would present an even greater challenge later this year.
Then again, maybe the dark cloud over summer business will blow away. "There's nothing to worry about this summer if this bit of inflation goes away and the consumer continues to think the economy is wonderful," Dinh said.
 -- by staff writer Alex Frew McMillan
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