A stable demand environment for flights and the absence of huge hikes in crude oil prices helped U.S. airlines post solid results in the third quarter. The recovering U.S. economy even allowed a few carriers to raise their passenger fares resulting in higher yields. Five out of the six largest U.S. airlines, namely Delta (NYSE:DAL), Southwest (NYSE:LUV), US Airways (NYSE:LCC), JetBlue (NASDAQ:JBLU) and Alaska (NYSE:ALK), posted impressive y-o-y growth in top-line and net income in the third quarter. While United (NYSE:UAL) posted lower revenue and net income on a y-o-y basis as competition from low cost carriers and declining capacity impacted its passenger traffic.
Going forward these airlines are likely to maintain good performance in the near term as they continue to replace their aging fleets with new, fuel-efficient airplanes. However, any sudden rise in crude oil prices or the fiscal cliff can impact this assessment.
Stable demand environment enables growth in top-line and earnings in the third quarter
The U.S. economy continued to grow at a moderate rate in the third quarter. This resulted in a stable demand environment for flights on domestic U.S. routes. Demand for flights on Latin and Pacific international routes continued to rise driven by fast-growing economies of Latin America and Asia-Pacific. While demand for flights on Atlantic international routes declined on a y-o-y basis in the third quarter due to the continuing slowdown in European economy.
Reflecting this demand scenario, airlines increased their capacity on Latin and Pacific international routes and declined their capacity on Atlantic international routes. However, US Airways was an exception as it increased its capacity by 3.5% y-o-y on Atlantic international routes in the third quarter.  On domestic U.S. routes, the legacy carriers United and Delta lowered their capacities on a y-o-y basis as they continued to focus on international markets and Southwest maintained a near level capacity, whereas smaller carriers such as US Airways, JetBlue and Alaska raised their capacities on a y-o-y basis.
Higher capacity for US Airways, JetBlue and Alaska resulted in higher passenger traffic for these carriers. Growth in passenger traffic drove growth in their top-line for the third quarter. And low-cost carrier Southwest increased its passenger fares on several routes which drove growth in its top-line as well. Delta too benefited from higher passenger fares to post growth in its overall revenues for Q3 on a y-o-y basis.
Net income for these carriers was driven by growth in revenues and absence of an equivalent rise in fuel expenses. In all, for the six largest U.S. carriers, net income increased 22% y-o-y to $1.6 billion in the third quarter. Delta’s net income at approximately $1 billion constituted the largest share of this total net income.  Delta also started operations at its Trainer refinery complex at Philadelphia in the third quarter. This unique approach of backward integration to hedge against jet fuel price volatility is a first for the airline industry, and Delta anticipates the refinery operations to save $300 million in annual fuel costs from 2013.
However, United continued to post lower y-o-y revenue and net income in the third quarter due to lower capacity and increasing competition from low cost carriers particularly on Latin American routes. Operational performance of the carrier was also impacted due to the ongoing route optimization and integration costs between United and Continental. United’s revenue declined 2.6% y-o-y while net income was a mere $6 million compared to $653 million in the year-ago period.  Net income for carrier was impacted by a one-time special charge of $454 million related to labor agreements.
Fiscal cliff or a steep rise in crude oil prices can impact growth in the near term
Going forward, these airlines are likely to continue to post good numbers in the near term, benefiting from lower maintenance costs and higher fuel efficiency levels as they continue to replace their aging fleets with new fuel-efficient airplanes.
However, this optimistic forecast could be negated by two potential threats: fiscal cliff and a sudden spike in crude oil prices. The expiration of Bush-era tax cuts and spending cuts under the Budget Control Act of 2011 that take effect towards the end of 2012 and beginning of 2013 have the potential of seriously impacting the U.S. economy and thereby the demand for flights. And a sudden spike in crude oil prices can impact profit margins for airlines as fuel costs constitute approximately 35% of their total operating expenses.Notes: