The U.S. carriers recorded an improvement in traffic during April. The carriers are combating rising fuel prices with increasing fares and extra fees. Further, these are trying to control the drop in demand caused by the massive earthquake and tsunami in Japan on March 11.
Airline traffic is measured in billions of revenue passenger miles (RPM), which implies one mile flown by one passenger.
The consolidated April traffic inched up 1.1% at the largest U.S. airline United Continental Holdings Inc. (UAL), the lowest increase in the month compared to its peers. Domestic traffic fell 2.5% while international traffic grew 6.7% from April 2010.
The 3.2% growth in capacity (or, available seat miles) was offset by 170 basis points (bps) year-over-year decline in the load factor (percentage of seats filled with passengers). United Continental expects 8% to 9% year-over-year increase in unit revenue for the month of April, measured by passenger revenue per available seat mile (PRASM), a key metric in airlines.
Airlines traffic dropped 1% year over year in the first quarter due to lower demand caused by the March 11 disaster in Japan. In the recently concluded quarter, United Continental reported net loss of 41 cents per share. The loss outpaced the Zacks Consensus Estimate by 4 cents and the year-ago earnings by 17 cents on increased fares and extra fees, despite surging fuel prices.
In order to counter rising fuel prices, United Continental Holdings plans to cut its capacity approximately by 1% in May and 4% in September. Further, in a move to control the situation in Japan, United Continental is expected to slash 14% of its Japanese capacity in May. For fiscal 2011, the company expects capacity to be flat year over year.
Delta Air Lines (DAL), the second largest U.S. airline, reported a 2.6% year-over-year traffic increase in April on a 5.3% capacity growth partially offset by a 220 bps decline in load factor. Domestic traffic dipped 1.5% year over year on a capacity decrease of 0.2% and a 110 bps decline in the load factor to 83.1%. International traffic improved 9.6% year over year from a 14.4% capacity increase while load factor decreased 350 bps to 77.4%.
Delta Air Lines was affected the most by the Japan disaster as it has the largest presence in the country relative to other U.S. carriers. The company produced net loss of 38 cents that was wider than the year-ago loss. However, the loss strongly outpaced the Zacks Consensus Estimate. Airlines traffic inched up 1% year over year in the first quarter.
Delta raised its ticket prices for domestic as well as international flights several times in the recently concluded quarter, covering at least 70% of the rising fuel costs. Further, for the second half of the year, the company plans to cut its capacity in markets where fare hikes are unable to cope with higher fuel prices.
The low-cost carrier Southwest Airlines Co. (LUV) recorded a largest increase of 8.7% year over year in April traffic, relative to its rivals, on a capacity increase of 7.5%. The month’s RPM increased to 7 billion from 6.5 billion in April 2010. Load factor grew to 79.7% from the year-ago level of 78.8%. The company expects PRASM to increase 4% to 5% year over year for April 2011.
Airlines traffic in the first quarter increased 11.9% year over year. Since Southwest Airlines currently operates on domestic routes, it did not have to bear the brunt caused by the situation in Japan. The company will debut its international markets in the year following the last month’s acquisition of AirTran Holdings.
In the recently concluded quarter, Southwest delivered earnings per share at par with the Zacks Consensus Estimate as well as year-ago earnings.
March traffic for American Airlines, a wholly owned subsidiary of AMR Corporation (AMR), increased 2.7% year over year on capacity increase of 3.9% partly offset by a 90 bps decline in load factor. Strong international traffic (up 10.9%) was partially offset by weak domestic traffic (down 1.8%).
We remain concerned about the airline sector as a whole due to the escalating fuel prices and disaster in Japan that could stall the ongoing recovery of the U.S. airlines going forward.
Currently, we maintain our long-term Neutral rating on Southwest Airlines and Delta Airlines, and Underperform rating on United Continental Holdings. For the short term (1–3 months), Southwest Airlines retains the Zacks # 3 (Hold) Rank, Delta Airlines and United Continental Holdings retain the Zacks #4 (Sell) Rank.
AMR CORP (AMR): Free Stock Analysis Report
DELTA AIR LINES (DAL): Free Stock Analysis Report
SOUTHWEST AIR (LUV): Free Stock Analysis Report
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