Delta May Lead Airlines Back to Profit on Business Travel

Delta Air Lines Inc. and UAL Corp.’s United Airlines may lead U.S. carriers to the first quarterly profit in two and a half years as the industry benefits from cutting seats during the recession.

A revival in business travel is filling planes to record levels and helping boost average fares collected by airlines. The recovery is occurring amid the busiest time of the year for air travel, allowing carriers to build cash and mend their balance sheets.

“Happy days are here again,” said Michael Derchin, an analyst at CRT Capital Group LLC. “There is clear evidence that business travel has come back and they’re paying higher fares. And summer is off to a really strong start and planes are completely full.”

Second-quarter net income may total $1.7 billion for the 9 biggest U.S. airlines, said Derchin, who is based in Stamford, Connecticut. Each of the airlines should post a profit or break even, Derchin said.

Delta, the largest U.S. carrier, is scheduled to be the first of its peers to announce second-quarter results, on July 19. The Atlanta-based airline probably will report a profit of 67 cents a share, the average of 11 analysts’ estimates compiled by Bloomberg.

The group has lost money for 10 straight quarters, starting in the last three months of 2007, according to data compiled by Bloomberg. The carriers endured oil prices surging to a record $147 a barrel in 2008, the global credit crunch and recession, and the H1N1 flu outbreak that curbed summer travel in 2009.

Less Capacity

Airlines helped set the stage for the recovery by reducing capacity starting in 2008 as demand collapsed. The six biggest U.S. carriers trimmed 2010 capacity by 2.8 percent through May, in addition to a 6.9 percent cut last year that was the largest since 1942.

“From where we sit, just looking at credit profiles and balance sheet recovery, the corner has been turned,” said Bill Warlick, a Chicago-based analyst at Fitch Ratings. “Cash is being generated, positive free cash flow is being directed to debt reduction -- all the things that will eventually create a more stable financial basis for the industry.”

Tighter supply coupled with rising demand is helping carriers increase ticket prices, a power they lacked in the past two years.

Domestic yields, or average fare per mile, have risen each month this year through May, after falling every month in 2009. On international flights, where business- and first-class travelers pay the highest fares, May yields jumped 28 percent on trans-Atlantic routes and 25 percent across the Pacific, according to the Air Transport Association trade group.

Global traffic rose 12 percent in May, pushing it above the pre-recession levels of early 2008 for the first time, the International Air Transport Association said June 29.

‘A Rising Tide’

“In this case, a rising tide lifts all ships,” said David Swierenga, president of consultant AeroEcon in Round Rock, Texas. “It’s driven principally by the recovery in the U.S. economy and the fact that carriers have been very cautious about adding capacity.”

Continental Airlines Inc., which is set to report earnings on July 22, said planes flew fuller than ever during May and June. Southwest Airlines Co., which is due to release results on July 29, had 11 consecutive record months until June, when occupancy slipped to the second-highest level.

“Airlines are carrying more passengers today who are willing and able to pay an airfare that at least covers the cost of the service provided,” Michael Linenberg, a Deutsche Bank AG analyst in New York, said in a June 25 report. “Imagine that!”

Oil, Labor Costs

The biggest risks now for airlines are rising oil prices, a double-dip U.S. recession and potential strikes by labor groups in contract talks at most of the major carriers, Derchin said.

While spot jet-fuel prices in New York harbor have fallen 11 percent since May 3, the high for 2010, the average price in the first half was 42 percent more than a year earlier. Fuel and labor are the two largest costs for most airlines.

Pilots and other work groups are in negotiations at United, Continental, AMR Corp.’s American Airlines and US Airways Group Inc., and unions for American’s flight attendants and airport ramp workers want to be released from further bargaining under federal labor law so they can strike.

Global economic weakness and the possible effect on oil prices from Middle East political unrest are also concerns, said Hunter Keay, a Stifel Nicolaus & Co. analyst based in Baltimore.

Stock Catalysts

The Bloomberg U.S. Airlines Index of 12 carriers rose 14 percent this year through yesterday, topping the 1.8 percent decline for the Standard & Poor’s 500 and the less than 1 percent drop for the Dow Jones Industrial Average. The airline index has slipped 10 percent since its 2010 high on April 15.

“I see fewer and fewer catalysts” for airline shares to rise, Keay said. “I’m in more of a ‘show-it-to-me’ frame of mind. I’m worried about a plateau in business travel.”

Revenue should continue to strengthen in the third quarter on increasing peak-travel surcharges, fewer and less aggressive fare sales and “continued gradual improvement in core demand,” William Greene, a Morgan Stanley & Co. analyst in New York, said in a July 12 note to investors.

“The airline industry is firmly in the recovery phase,” he said.

To contact the reporters on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net; Mary Schlangenstein in Dallas at maryc.s@bloomberg.net.

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.