A mixed bag of first-quarter revenue results from the largest U.S. airlines could set the stage for the onset of renewed industry margin pressure as jet fuel costs stay high and the air travel demand outlook remains uncertain. Fitch Ratings sees persistently high fuel prices and potential difficulties in passing on rising costs through more fare hikes as the primary risks facing U.S. carriers moving into the peak spring and summer demand period.
While a continuation of strong booking trends and successful first-quarter industry fare actions helped some carriers report healthy passenger unit revenue results through the winter, increasing signs of a moderation in revenue per available seat mile (RASM) growth represents a significant and ongoing source of concern this year.
Passenger yield and unit revenue growth has not been uniformly strong across the industry in the first quarter. While Delta and US Airways both reported respectable March revenue trends this week, United has guided to first-quarter unit revenue growth of only 4%-5%, well short of recent quarterly gains.
Most carriers have indicated that both international and domestic demand remains strong, and Delta noted that late March bookings, particularly for high-fare business customers, showed improvement. This suggests that more disappointing revenue numbers at United and Southwest may reflect the impact of network changes and merger integration issues at those two carriers, rather than an industry wide trend.
Still, we believe an extension of industry capacity discipline through the remainder of the year will be essential if jet fuel costs average well above $3.00 per gallon for the remainder of the year. The demonstrated willingness of U.S. airlines to pull back capacity growth and boost fares has been the key driver of the recovery in industry margins and free cash flow generation, since the depths of the recession and the air travel demand collapse in 2009.
With the notable exception of JetBlue, which plans to grow scheduled capacity by 5.5%-7.5% this year, all of the largest U.S. airlines have reined in available seat mile growth this year. United, in response to heightened fuel pressure, announced that more capacity would be taken out of the 2012 plan, pushing its projected full year ASM reduction to 0.5%-1.5%.
Taken together, additional industry fare hikes and generally consistent fuel hedging programs could limit the damage of further energy price spikes, but an erosion of pricing power could quickly result in margin compression, even in a relatively stable fuel price environment. Consequently, we think investors should stay focused on any signs of renewed softness in monthly unit revenue comparisons through the spring and summer.
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