Airlines Seeing Friendlier Skies As Profits Rise

Aug. 09--Airlines are making money again, with U.S. carriers reporting record profits for the second quarter of this year, but don't look for them to use that money to add flights or upgrade service.

Where airlines once burned through cash the way a jumbo jet burns fuel, these days they are content to stay in a financial holding pattern.

The profits are either given back to investors, in the form of dividends or stock buybacks, or used for expansion, said Jay Sorensen, president of IdeaWorks, a Shorewood airline industry consulting firm.

"I don't think the latter is going to happen, in terms of expansion," he said. "Airline management is going to push back against that because that's what got them into trouble in the first place."

Southwest Airlines CEO Gary Kelly all but said as much in a July 24 conference call to discuss the company's second quarter earnings.

"Right now, the demand is very strong and it is balanced very nicely with the supply of seats," Kelly said. "We're going to manage our growth very carefully so that we don't upset that balance."

Southwest, the market share leader at Milwaukee's Mitchell International Airport, reported record second-quarter profit of $465 million and set records for full planes and passenger fare per mile. Revenue rose 8%. In July, the airline's planes were 86.7% full.

Those numbers certainly are strong, but the recent past continues to haunt airlines, leaving them gun-shy about spending money.

"The only other thing that I think needs to be mentioned here is that we've lived through a brutal decade where every balance sheet in the industry was stressed and most went bankrupt. So you just can't extrapolate 2014 into infinity," Kelly said.

"We do want to make sure that we err on the side, financially, of being conservative and being very well prepared for the unpredictable," he added. "The unpredictable's happened a lot to us in 43 years."

More service cuts

Among other carriers, American Airlines, only eight months removed from bankruptcy, said it will pay its first dividend in 34 years, a cash payout of 10 cents per share.

American reported net income of $864 million in the second quarter. Excluding special charges related to taxes and bankruptcy and merger costs, the profit was $1.5 billion, a quarterly record for the carrier.

So will it put any of that money into additional services? No. Actually, it's cutting some in-flight meals.

The carrier, in the process of merging with US Airways, will stop serving free meals to first-class and business-class passengers on flights shorter than 2 hours and 45 minutes, beginning Sept. 1.

American now serves full meals on flights longer than two hours. The change is being made as part of the US Airways merger and is meant to keep consistent policies between the two airlines.

The airlines will continue to serve snacks such as fig bars, pretzels, fruit and cookies on shorter flights. Passengers in the economy sections can buy meals on flights longer than 2 hours and 45 minutes.

"We have to make sure our customers have a consistent experience, no matter what airline they choose," American Airlines spokesman Casey Norton said.

Making up ground

To be fair, American is doing things to bolster its business using the profits it earned in the quarter.

The carrier will spend more than $2.8 billion on debt and aircraft lease prepayments, $1 billion to buy back shares and pay $600 million toward additional pension contributions.

All of those moves make sense.

"When you run an organization that was bankrupt or operating with poor financial results, it becomes threadbare. They need to make capital investments. They need to consider salary increases or profit-sharing increases," Sorensen said.

"Hallelujah, they are making money," he added. "They need it."

Still, the timing of the meal service cutbacks was poor.

"That's not the message that should be given right now," Sorensen said. "The message should be that, 'We are profitable. We are maintaining or improving the product for the consumer.'"

Four carriers, Southwest, Delta, American/US Airways and United, control more than 80% of the domestic airline market. All four serve Milwaukee.

With so much of the industry concentrated with a few carriers, it hasn't made attracting new service to Mitchell any easier.

Attracting more air service is a top priority for Mitchell management, Harold Mester, public relations manager for the airport, said in an email.

"We meet with airlines on a regular basis, including frequently hosting airline executives in Milwaukee. We also invest significant resources into promoting Milwaukee as a cost-effective alternative for air carriers looking to serve the Chicago market," he said.

The airport also has an air service incentive program to help offset the costs of new or expanded service from Milwaukee, he added.

Still, the airport has made some gains. "We now have year-round nonstop service to Seattle, San Francisco and Los Angeles, which were previously served on a seasonal basis," Mester said.

Southwest is adding service to Cancun, and Frontier recently added some Florida service.

Adjusting to a new order

The Milwaukee County owned and operated airport is adjusting to the new order in the airline industry and its status of no longer being a major airline hub.

"Milwaukee's air service is resetting in the wake of the airline industry's new business model that parked feeder planes and moved to full-size mainline jets," Mester said.

That new model also means that, if planes aren't full, they won't be flying a particular route for long.

It's the butts-in-seats model. If there are not enough butts, the seats go away.

At Southwest, for example, trips flown in July were 113,099, down 3.7% from 117,402 in July 2013. Year to date, the airline's trips flown as of July was 740,080, a 5% drop from 779,508 in 2013.

"Air service is largely 'use it or lose it,'" Mester said. "Growth in population, employment, industry, commerce, conventions and tourism are the biggest factors that create demand and result in more air service."

Industry watchers don't expect things to change much.

"The industry is happy to bask in the glow of making money for once," Sorensen said.

The Associated Press and Los Angeles Times contributed to this report.

FLIGHT PATH

Airline market share at Mitchell International Airport as of June:

Southwest Airlines: 47.20%

Delta Air Lines: 25.83%

American Airlines/US Airways: 12.18%

United Airlines: 9.41%

Frontier Airlines: 4.87%

 

 

Copyright 2014 - Milwaukee Journal Sentinel

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