Hope Amid the Airlines' Red Ink

Posted by: Justin Bachman on July 22

Continued hemorraghing of red ink today from airlines. Three big ones, United, US Airways and JetBlue, all swung to losses in the second quarter because of high fuel costs. From an investor standpoint, however, there was some ample good news in these reports. First off, revenue was up at all three airlines, 3% higher at United and US Airways, and up 18% at JetBlue. Secondly, the two legacy carriers reported decent acquiescence by consumers to the slew of new fees that have been imposed this summer. Third, the drastic capacity cuts and new fees have not yet materialized for the industry. Given summer travel, the airlines have placed their bets to come due after Labor Day, which means the numbers that come in during the winter may hold some pleasant surprises for the industry. Lastly, I think we are seeing the very first – and very subtle – steps in what will be a combination of United and Continental. (Details below the jump.)

As part of its income statement, United said it would cut more than 7,000 jobs by the end of next year as it works on “sizing the business appropriately for the environment.” The reduction was bigger than previous statements, and represents some deep cuts coming to the airline’s hubs at Denver and Los Angeles. Shares of parent UAL Corp. popped 35%, before jumping another 33% in midday trading, after it also announced a new deal with JP Morgan Chase to extend their credit-card affiliation program, which will boost United’s cash position by more than $1 billion. The card processor also will reduce the amount it retains on credit-card transactions. UAL shares finished the day 68% higher, at $8.41.

The Chicago-based airline lost $2.7 billion in the second quarter, as fuel costs decimated all other aspects of the business. Of that loss, “a direct result of the punishing price of fuel,” CFO Jake Brace told analysts, $2.3 billion was a noncash charge to write down the value of impaired assets. Without the charge, the loss was $151 million. United’s revenues rose 3% to $5.4 billion.

At US Airways, fuel costs led to a $567 million loss. The company also wrote down $640 million in goodwill related to its acquisition of the former US Airways Group and for costs associated with returning aircraft it no longer wants. Without those and other charges the Tempe, (Ariz.)-based company would have lost $101 million. Revenue was up 3% in the quarter. US Airways shares gained 59% to $4.27.

JetBlue Airways lost $7 million on revenue of $859 million, and saw its stock jump 16%. The company also said it was deferring ten Embraer jets scheduled to begin arriving next year, and announced a new $110 million credit line with a unit of Citigroup. In September, it is also ending service from Ontario, Calif., a fast-growing region east of LA.

One interesting bit raised today by executives of both legacy airlines was the apparent acceptance of passengers to all the new fees. Both have announced plans to begin charging travelers to check a bag, and US Airways is deep in experiments about how to wring extra dollars from window, aisle and exit seats. You may roll your eyes and whinge about the inhumanity of it all, but Americans seem to have got on board about paying up. US Airways boosted its annual expectation of revenue from such by $100 million, to a range of $400 million to $500 million per year; United expects about $275 million in new money from baggage fees. “What we’re seeing in ancillary revenues looks real and long term,” US Airways CEO Doug Parker said on a conference call.

As for United, it is hard to overstate how giddy that company is about Continental’s addition next year to the Star Alliance – which also aims to keep US Airways as a member. Beyond the usual route and seat agreements that come with an airline alliance, United is contemplating all sorts of joint ventures, purchasing deals, and advice-sharing initiatives with their new best friends from Continental. (Indeed, Continental CEO Larry Kellner was chumilly referred to as “Larry” several times on the analyst call.) United chief Glenn Tilton assured the analysts that his team is working to ensure that the Continental deal “extends well-beyond simple codesharing benefits.” To my ear, that sounds like Larry is going to be the boss of the whole behemoth airline come 2010 or so. In fact, a person familiar with the thinking of United management told me last week that over time Continental is expected to get ever-deeper into the business and could begin running United almost as a subsidiary. If this partnership is deep and broad enough, in other words, why endure all the expense and turmoil of a traditional acquisition if you can realize nearly all the same benefits in a different way?

So, as bad as things may look now, the underlying economics are shifting rapidly. That’s bad news for ticket buyers, but a long-awaited sliver of hope for the airline industry, which could even turn a profit in 2009, Parker predicted Tuesday. “We’re going to get this fixed as an industry,” says the CEO. “And I’m really encouraged by what the industry is doing.”