Major U.S. airlines dropped into the red in the first quarter as rising fuel prices squeezed margins, putting pressure on carriers as they enter the peak summer travel season. Still, analysts say most airlines are likely to be profitable this year after trimming fat, raising ticket prices, and adding new and higher charges for luggage and food. A rebound in corporate travel has also helped bolster the recovery.
The question isn’t whether they will be profitable, but rather “how profitable,” says Savanthi Syth, an analyst with Raymond James. Syth told Reuters that the industry is in a “better position to recoup fuel increases” after having cut back flights to match demand.
Big U.S. carriers will report results for the first quarter over the next few weeks. Southwest Airlines (NYSE:LUV) will kick things off on April 19. Analysts expect the biggest carriers to post losses for the quarter, even if they are expected to post gains for the year. Southwest warned last month that it would not post a profit for the January-March quarter, citing high fuel prices. Salary and wage costs will also offset higher revenues in the first quarter, which is typically the industry’s weakest already, according to Deutsche Bank analyst Michael Linenberg.
Still, Delta Air Lines (NYSE:DAL) may show improved operating margins after cutting costs and bolstering corporate business, said Linenberg. Southwest and United Continental Holdings (NYSE:UAL), on the other hand, will report operating losses due to merger-related costs, he added. American Airlines parent AMR Corp. is operating under Chapter 11 bankruptcy protection.
Accounting for roughly one-third of an airline’s costs, fuel remains a major wild card for the most recent quarter. U.S. crude prices peaked at $110 in March, while the international benchmark, Brent, peaked at just over $128 last month. Though prices have begun to decline for now, should they rally again, leisure passengers will likely be charged more for airline tickets, which could result in some rethinking travel plans, thus hurting sales.
So far, demand seems to be steady with prices at current levels, and business travelers, the new focus of many airlines, tend to tolerate higher airfares than those passengers with leisure pursuits. “Business travel is generally more resilient than leisure travel, so unless fares begin to skyrocket beyond what’s already expected, business travel demand should remain consistent,” said Clem Bason, president of the Hotwire Group, which includes travel websites Hotwire.com and CarRentals.com.
However, U.S. carriers have had more trouble pushing through fare hikes this year than last. Within the first three months of 2011, airlines had successfully pushed through six fare raises. So far this year, they’ve only been successful with three fare hikes out of five attempts, according to Rick Seaney, chief executive of Farecompare.com. Domestic air fares are up about 5 percent so far this year and up about 10 to 12 percent from a year ago, he added.