Airline Industry Flying High Into Profits

 |  Includes: AAL, ALK, DAL, JBLU, LUV, UAL
by: Robert Herbst


Airlines included in this report are: United (NYSE:UAL), Delta (NYSE:DAL), American (AAMRQ), US Airways (LCC), Southwest (NYSE:LUV), Alaska (NYSE:ALK), and JetBlue (NASDAQ:JBLU). "Industry" for this report includes the airlines noted above.

The macro view first

The industry reported over $37 billion in revenue for the second quarter 2013. This was the third consecutive record revenue for the second quarter. To put this in perspective, this is a 76% increase over second quarter revenue just 10 years ago.

Even more impressive is the recent record second quarter cumulative profit of $2.5 billion, which was led in large part by Delta. This second quarter profit was 25% higher than last year's record $1.98 billion. And if that doesn't get your attention, the cumulative profit margin was 6.6%. You have to go all the way back to the year 2000 to find a higher profit margin for the second quarter.

US Airways, Southwest, and JetBlue set records for second quarter revenue. The rest of the carriers barely missed their record.

On the profit side, Delta and US Airways set records. Southwest and Alaska just missed their record.

Each airline's second quarter revenue, profit and margin (in millions):

Delta.......... $ 9,707... $844... 8.7%

US Airways.. $ 3,865... $324... 8.4%

Alaska........ $ 1,256... $105... 8.4%

Southwest.. $ 4,643... $274... 5.9%

American.... $ 6,449... $357... 5.5%

United....... $10,001... $521... 5.2%

JetBlue...... $ 1,335.... $ 36... 2.7%

One of the reasons for the record second quarter profits was due to the significant drop in the price of jet fuel. For the recent second quarter, the airlines above collectively expensed $11 billion (30% of revenues) for fuel, which was $1.3 billion less than last year. The second quarter average spot price for jet fuel was an unexpected 6.4% lower this year compared to last year.

Outlook for full year 2013 LLC projects the airlines listed above will collectively report records of $144 billion in revenue and $6.7 billion in profits.

While fuel price volatility and global events will create unpredictable pressure on revenue and profits, consolidation of the industry is the big driver behind enough pricing power to expect consistent profits not seen since the deregulation of the industry back in 1978.

Airline-by-airline summary of highs and lows

Delta: Has been hitting on all cylinders for the past few quarters and continues to outperform the industry.

For the second quarter, Delta:

- Led the large network carriers in unit revenues and passenger yields

- Continues to improve their balance sheet by reducing debt

- Led the industry in net profit margins and is projected to lead the industry for 2013 profits

- Full-year projections are for a 6.3% profit margin from $37.4 billion in revenue

United: Until United resolves its ongoing labor issues from the 2010 merger with Continental, it will continue to struggle both operationally and financially.

For the second quarter, United:

- Had relatively weak profit margins

- Was the only airline to have a y/y decrease in passenger revenue and capacity

- Had the highest y/y increase in net-debt for the net-work carriers

- Has the highest network carrier net debt ratio of operating revenue

- Full-year projections are for a 4.0% profit margin from $38.5 billion in revenue

American: About the best thing that can be said for AA is that its historically dismal operational performance and billions in cumulative losses is close to the end, as it will merge with US Airways in a few weeks.

For the second quarter, American:

- Had especially low end profits when recognizing it had financial advantages provided through American's bankruptcy

- Had the industry's worst operating margin

- Had the lowest unit revenues for the network carriers

- Had nearly all of its profit come directly from the y/y reduction in labor costs

- Full-year projections are for a 3.2% profit margin from $25.6 billion in revenue

US Airways: Continues to have strong operational and financial performance. In the next few weeks, US Airways management will take over American Airlines. It is our expectation that the merging of US Airways and American under CEO Doug Parker will provide very strong global competition to United and Delta and will further challenge Southwest's lead for the domestic market share.

For the second quarter, US Airways:

- Had the industry's second best profit margins only slightly less than industry leader Delta

- Had the network carrier's highest operating and EBITDAR margins

- Had the highest y/y increases for capacity, revenue, and load factor (network carriers)

- Full-year projections are for a 4.3% profit margin from $14.5 billion in revenue

Southwest: Continues to be challenged by increasing unit costs. While Southwest's costs have been steadily increasing, network competitors were very successful at lowering their costs. Southwest is now being aggressively challenged by relatively stronger network carriers for domestic market share. The ongoing merger with AirTran adds some much needed international markets, which should increase the top-line revenue.

For the second quarter, Southwest:

- Had profit margins at the low end of the industry

- Continues to have the industry's lowest load factors, putting pressure on its attempts to increase fares

- Leads the industry with labor costs

- Has a very strong balance sheet with low net-debt ratio

- Full-year projections are for a 4.5% profit margin from $17.6 billion in revenue

Alaska: Quarter after quarter, Alaska has reported strong financial and operational performance.

For the second quarter, Alaska:

- Had the industry's highest operating margin and EBITDAR ratio

- Has a strong balance sheet with the industry's lowest net debt ratio

- Full-year projections are for a 7.8% profit margin from $5.0 billion in revenue

JetBlue: Is getting beat up by the much stronger network carriers on the high end, and Southwest and Virgin on the lower end. There should be no arguments that JetBlue's long-term outlook is dismal.

For the second quarter, JetBlue:

- Had the industry's lowest profit margin

- Has the industry's lowest unit revenues and passenger yields

- Has the industry's highest net debt ratio

- Full-year projections are for a depressing 1.8% profit margin from $5.4 billion in revenue LLC is a globally recognized company that provides airline industry data, analysis and consulting services.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The above opinions and comments should not be used to determine the worth of any stock or investment. At the time of writing, the author and/or his family held stock and/or derivative positions in American Airlines.