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Mixed results in the air
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October 19, 1999: 4:59 p.m. ET
Northwest misses, America West exceeds, Southwest meets estimates
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NEW YORK (CNNfn) - Three of the nation's top airlines reported results Tuesday, with Northwest Airlines missing estimates, America West Airlines exceeding estimates, and Southwest Airlines proving that analysts were just right in their projections.
The results followed reports Monday by two other major carriers, Delta Air Lines (DAL) and Continental Airlines (CAL), that beat estimates but were hurt by costs related to Hurricane Floyd and higher fuel prices. Fuel is the second-largest operating expense at most carriers behind labor costs, which also have been trending up in the industry.
Difficult numbers ahead in sector
The nation's two largest carriers, AMR Corp. (AMR), owner of American Airlines, and UAL Corp. (UAL), owner of United Airlines, are due to report results Wednesday, along with US Airways Group Inc. (U) The numbers from the industry so far suggest the sector is being hit by sluggish revenue and increased fuel prices. Analysts are expecting earnings of $1.69 a share, diluted, at AMR, down from $2.48 a year ago, and $3.76 a share at UAL, down from $4.02 a year ago. US Airways has been warning that it will lose money in the quarter due partly to labor unrest, leading to flight cancellations. Analysts are looking for a 35 cent a share loss there.
But analysts said a recent move by carriers, led by United, to cut commissions to travel agents will be enough to cover some of the increased fuel costs.
Northwest recovers from strike
Northwest (NWAC), aided by comparisons to the pilot strike-plagued quarter a year earlier, reported third-quarter net income of $180 million, or $1.96 a diluted share, compared with a loss of $224 million, or $2.91 a share, a year earlier. But analysts surveyed by First Call expected the Minneapolis-based airline to make $1.98 a share in the current quarter.
While airline officials claimed to be pleased with results, they also warned of softness in fares that they attributed to industry overcapacity and annual rises in fuel costs.
"Should these trends continue, the company's fourth-quarter financial performance could be adversely impacted," the company cautioned in its statement. Analysts are projecting earnings of 57 cents a share in the fourth quarter.
Revenue at the airline rose 47.4 percent to $2.8 billion.
For the first three quarters of the year, Northwest posted net income of $271 million, or $3.34 a share, compared with a $104 million, or $1.25 a share, loss in the year-earlier period. Revenue climbed 13 percent to $7.7 billion.
Despite missing estimates, Northwest's stock ended Tuesday trading up 1/2 at 26-1/4. Even some of the analysts who were overly optimistic about its third quarter earnings said now is not the time to dump Northwest stock.
"We think all the bad news is in the stock price and think they'll benefit from recovery in Asia when and if it does occur," said Candace Browning, airline analyst at Merrill Lynch & Co., who has Northwest rated as an "accumulate."
But even some of the more bullish Northwest analysts see some clouds on the horizon, such as the fuel and soft fare environment.
"They (airline officials) are afraid things could deteriorate further," said Ray Neidl, analyst at ING Barings. "That's why I have a 'buy' rather than a 'strong buy.' "
America West soars over estimates
America West Holdings Corp. (AWA), parent of America West Airlines and tour packager the Leisure Co., reported record third-quarter net income of $22.2 million, or 57 cents a diluted share. Analysts had been expecting only 51 cents a share in the period. A year earlier, the company posted income of $21.8 million, or 49 cents a share.
Revenue at the carrier rose 10.7 percent to $552.8 million.
The carrier's margins were squeezed by a 27.2 percent hike in aircraft fuel costs and an 11.8 percent increase in salaries and related costs. Aircraft rental costs rose 14.5 percent in the period.
In the first nine months of 1999, the carrier's net income rose to $90.4 million, or $2.26 a share, from $88.4 million, or $1.88 a share, a year earlier. Revenue rose 8.3 percent to $1.6 billion in the three quarters, compared with $1.5 billion a year earlier.
Commission cuts recoup fuel spike
America West also followed other carriers' recent actions to cut and cap travel agent commissions. It said it would pay a 5 percent commission capped at $25 for one-way tickets and $50 for round-trip tickets. The move follows the announcement Oct. 7 at United Airlines (UAL) that it was cutting commissions to 5 percent from 8 percent -- a move that has been widely followed since then.
Phoenix-based America West, the nation's ninth- largest, walked away from takeover discussions with other carriers early this year due to regulatory and employee relation concerns and the highly conditional nature of the bids. Its stock gained 1-3/8 to close at 19-3/16 in Tuesday trading.
"To a large degree it (the cut in commissions) is helping offset the fuel prices," said Neidl. "You're talking about some big bucks there. That's 3 percent of revenue to people who book 80 percent of your flights."
Delta may be the best positioned to benefit from the commission cuts, said Browning, because it is 80 percent hedged on fuel purchases through next June and 60 percent hedged on fuel through June 2001.
"In most cases the commission cuts will offset fuel," she said. "In the case of Delta, you should see it go down to bottom line." She sets Delta's 12-month price target at 80, compared with Tuesday's close of 50-3/8, unchanged on the day.
Southwest on target
Southwest Airlines (LUV) also weathered increased fuel and Hurricane Floyd-related costs to post third-quarter net income of $127 million, or 24 cents a diluted share, the same as analysts' estimates. A year earlier, the company made $129.6 million in the quarter, which also came to 24 cents a share. The company's shares outstanding have increased 1 percent in the past year, leading to the lower per-share figure in the 1999 period.
Revenue at the carrier was up 12.8 percent to $1.2 billion. Fuel costs rose 47.6 percent in the period. The company said that, excluding fuel, unit costs were up 0.6 percent for the quarter.
For the first nine months of 1999, the Dallas-based carrier's net income increased to $380.6 million, or 71 cents a diluted share, from $333.0 million, or 63 cents a share, a year earlier. Revenue rose 13.3 percent to $3.5 billion.
Southwest's stock was unchanged at 16-3/4 in Tuesday trading, after opening at 17-3/16.
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