Mergers Bolster Profits For U.S. Airlines

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Despite everything that has been working against them, including a dismal global economy and rising fuel prices, the top U.S. airlines - United Continental, Delta Air Lines, US Airways and Southwest Airlines - all turned profits last year.

Their recipe for success has been straightforward: fewer airlines, fewer planes and fewer seats, combined with higher ticket prices and more fees.

While the U.S. economy is showing signs of strength, the airlines have indicated in their latest earnings reports that they intend to stick to the formula. Oil prices averaged about $100 a barrel last year, about the same level as in 2008.

But the airlines delivered higher-than-expected profits for 2011, while they had lost 17 cents for every dollar of revenue they generated in 2008. In those three years, Delta completed its purchase of Northwest Airlines, United merged with Continental and Southwest bought AirTran Airways.

Meanwhile, American Airlines, left out of the latest round of consolidation, filed for bankruptcy protection in November after losing billions of dollars in recent years. The carrier hopes to be able to pare its costs during the restructuring process and emerge as a leaner, profitable carrier. That prospect has also set off renewed talk about a possible bid for American Airlines by one of its competitors, perhaps Delta or US Airways.

''What the industry has done in three years is remarkable,'' said William S. Swelbar, a research engineer in the Massachusetts Institute of Technology's International Center for Air Transportation. ''Airlines seem to be much more stable than I can remember in decades. Consolidation is having a significant impact on pricing, no doubt. And the industry has rid itself of unprofitable routes.''

The airlines hope they can continue to raise revenue this year faster than fuel prices rise, while cutting capacity to offset weak demand.

Labor relations are likely to take center stage in 2012. As part of its restructuring process, American Airlines is seeking to renegotiate its work agreements with pilots and other labor groups in a bid to cut its costs, which are the highest among its peers. These talks may put pressure on Delta and United, also facing labor negotiations this year, to address costs that have been slowly rising in past years.

United, the top U.S. carrier since its 2010 merger with Continental Airlines, said Thursday that it had cut its capacity, or the number of seats flown, 2.5 percent in the fourth quarter. Meanwhile, it increased ticket prices 9 percent from the period a year earlier. As a result, United reduced its fourth-quarter net loss to $138 million, after a loss of $325 million a year earlier, the company said.

The loss was largely attributed to costs associated with the merger. Revenue was up 5.5 percent, to $8.9 billion, in the quarter. Excluding one-time items of $247 million, United reported a net income of $109 million in the fourth quarter. The company recorded a full-year profit of $840 million, down 12 percent from 2010.

United's shares rose 6.3 percent Thursday to $21.70. Shares of Delta also rose for a second day, after the company said Wednesday that fourth-quarter profit had risen to $425 million, up from $19 million in the same period a year earlier. In the quarter, Delta filled nearly 82 percent of its seats while it reduced capacity by 3.5 percent. As a result of higher ticket prices and higher fees, Delta increased its overall revenue 11 percent in 2011, while it operated 30 fewer planes than in the previous year, said Richard Anderson, the airline's chief executive.

Delta reduced its capacity to most of its destinations, especially Europe, which saw a 10 percent drop. Latin America was a rare exception: Delta increased capacity in the region 5 percent. The company said it would continue to reduce its capacity in the first quarter 3 percent to 5 percent.

At Southwest Airlines, net income grew 16 percent in the fourth quarter, to $152 million, with a 32 percent jump in revenue to $4.1 billion.

US Airways said its net income had declined 35 percent to $18 million in the fourth quarter. Even though its revenue in that period rose 8.5 percent to $3.2 billion, fuel costs rose faster.

Alaska Airlines and JetBlue Airways also posted a profit in the final quarter. JetBlue is one of the industry's few exceptions in raising its capacity in 2011 - the airline increased seats by 10 percent in the fourth quarter, with new flights to the Caribbean and to Boston. It expects to keep adding more flights to its schedule this year.

The airlines said they expected these gains to continue in the first quarter of 2012.

''If anything, the new year has seen a step-up in business demand,'' said Scott Kirby, the president of US Airways. ''The pricing environment remains strong and the industry is successfully recovering high fuel prices.''

Separately, US Airways confirmed in the past week that it was interested in exploring a deal with American Airlines.

A combination between US Airways and American would create a carrier roughly the same size as United, Delta and Southwest.