Airlines rise above the storm clouds

Steve Tripoli Jul 19, 2006

KAI RYSSDAL: Some news now that you haven’t heard in a while Happy profit reports from the airline industry. Southwest announced second-quarter profits today. More than doubled from the same time a year ago. American Airlines surprised just about everybody by tripling its earnings. Those numbers boosted the stocks of other major U.S. airlines as well. And Marketplace’s Steve Tripoli reports it looks like clear skies ahead.

STEVE TRIPOLI: The story in a nutshell is that the industry’s turning around. Analyst Michael Boyd of the Boyd Group in Colorado says that especially applies to older so-called “legacy carriers” like American, Continental and Northwest. Those are the airlines that have entered or flirted with bankruptcy lately.

MICHAEL BOYD: They’ve gotten their costs down, and more importantly they’re now starting to capitalize on what low-cost carriers don’t have, which is their huge revenue stream.

Especially revenue from lucrative international routes. Bryson Monteleone of Morton Beyer & Agnew in Virginia says the legacy carriers have wised up about going with what pays.

BRYSON MONTELEONE: If they do very well on using their assets for the high-margin traffic, that is usually international, then they have that strength over the low-cost carriers which only can focus on domestic capacity.

Then there are fuel costs. Southwest has been paying almost 90 cents a gallon less for fuel lately than other US carriers, thanks to a strategy of hedging fuel prices. That’s been a giant advantage and it showed up in today’s numbers.

But Michael Boyd says that edge is about used up. And now the older players who’ve already cut costs may be set to turn the tables.

BOYD: Southwest, a fine carrier, has a lot of work to do going forward to get its labor costs down in the future and to accommodate the loss of these hedges. A hedge is a bet. They won the bet, but that bet’s gonna evaporate. And that means it’s gonna be at a disadvantage compared to American.

So the old-timers may have positioned themselves to throw their weight around more. They’ve been filling more seats, working with unions to cut costs, pulling in new revenue from outside maintenance, and they may be lined up for a government break regarding their pension obligations.

All that, plus those richer routes. The runways have become more level. Start your engines.

I’m Steve Tripoli for Marketplace.

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