Industry Net Loss This Year Pegged At $5.6 Billion

World Airline News, Nov 2, 2001

Cheap Tickets, Less Traffic Spell Revenue Troubles

This year's net loss for the U.S. airline industry is likely to be $5.6 billion instead of the $2.3 billion forecasted prior to the Sept. 11 attacks, according to a new analysis by UBS Warburg. The revised forecast was quickly followed by hard data from the Air Transport Association (ATA) showing that a sharp drop in ticket prices, combined with a 32 percent decline in passenger traffic, caused airline revenues to plummet 45 percent in September.

On Oct. 23, ATA's Office of Economics said average airfares declined 18.7 percent in September. The average domestic airfare paid in September was $118.54. Coach fares were down 19.0 percent and first-class fares dropped 15.5 percent.

Some Wall Street analysts say United Airlines [UAL] could lose close to $1 billion when its third quarter earnings are reported Nov. 1. And on Oct. 24, American Airlines [AMR] reported a net loss of $414 million for the third quarter, despite receiving $508 million in direct government grants that were part of a $15 billion bailout program. The third quarter loss would have been $525 million without the grant money. According to Don Carty, American's chairman and CEO, the Sept. 11 attacks have had a "staggering effect" on overall financial performance, producing the largest quarterly loss in the company's history.

In a related sign of the times, a net loss of $285 million in the third quarter for Raytheon Company is largely due to declining sales of commercial aircraft.

The Oct. 22 analysis by UBS Warburg says that airline industry losses are likely to continue throughout 2002, except for a "brief seasonal brush" with profits in third quarter 2002. It says the industry net loss for next year is likely to be $2.4 billion. It also notes that the rate of traffic, and presumably revenue recovery, has stalled out in the past two weeks.

A seven-day rolling average of daily traffic declines has stabilized in the 28 percent range for the past two weeks, a not-so-great development. Yields also remain soft - suggesting that October revenues will be down in the 35-40 percent range. "We need to see steady improvement in traffic/revenue to hit our forecasts- and this has simply not been happening in the past several weeks," the UBS Warburg analysis says. "As one would expect, international traffic trends are very weak - particularly in the Atlantic and the Pacific."

The investment house also makes the case that it is unacceptable to ask business travelers to spend the equivalent of another workweek or two waiting at airports, over the course of a year. It notes that the perceived value of business air travel was low before the attacks. "Given the material increase in the necessary time commitment to airport processing, the time/ value proposition of business travel has suffered further," it says. "Corporations are rationally responding by increasing their experimentation with alternatives to commercial air travel - both virtual (video-conferencing, web casting) and physical (corporate charter). Consumer fears will surely recede, corporate substitution may not."

It is essential that all travelers - particularly business travelers - are able to establish reasonable expectations for airport processing times, according to the analysis. For example, it would like to see: real time estimates of wait times for front counter check-in and security clearance; estimated hold times on airline reservations calls; and dedicated security lines for high-value travel. "Predictability of the airport experience is of the essence and until the airlines can work this out (which they will), business travelers will continue to travel in reduced numbers," the analysis says.

Airline stock prices are down about 40 percent across the board, and UBS poses this question: If a person is not buying airline stocks now, when will he? The investment house acknowledges the "extreme risks" in the current operating environment and accepts that the risks may well exceed the tolerance level for many investors. "In effect, the risk premium for holding airline equity is at unprecedented levels," it says. Nevertheless, it says that the average airline equity has the potential to double from current levels over the next 18-24 months, with the equities of the riskiest survivors rising even more.

"While the current industry losses are staggering - and, by definition, not sustainable - at its most basic, we fundamentally believe in three basic concepts: 1) traffic will recover (because it always has); 2) the material federal assistance ($5 billion in grants, $10 billion in loan guarantees) will tide the industry over (because that's what the numbers show); 3) the industry will be profitable in the future (because it always has a couple of decent years)," the analysis says.

Based on UBS Warburg's industry forecast, most, if not all, of the majors carriers will avoid bankruptcy - assuming a relatively liberal use of loan guarantees. It concedes that there will be some close calls, and that some carriers might even benefit from a trip through bankruptcy proceedings. "But on balance, we believe the return opportunities for U.S. airline equities have never been greater," it says.