Airlines Taxi to Profits
U.S. carriers get a boost as global demand for excess jets helps them cut costs
Oil, steel, cement: They've all gotten more expensive as China, India, and other surging economies have been devouring the feedstocks of industrialization. That has raised costs for hundreds of American companies and helped fuel a prominent rallying cry: Globalization bad.
But one U.S. industry should be grateful that voracious foreign firms are gobbling up key assets. Most U.S. airlines are expected to post handsome profits when they report third-quarter earnings this month, marking a long-awaited pullout from five years of painful restructuring and $40 billion in losses since 2000. The turnaround is the result of widespread layoffs and ruthless cost-cutting, not to mention half a dozen major bankruptcies. But U.S. carriers have also been the surprise beneficiaries of soaring overseas demand for modern jets, which has allowed troubled carriers to shed unneeded airplanes and tackle one of the industry's chronic problems: too many seats.
By the end of the year, US Airways will have returned 61 jets to General Electric's aircraft-leasing unit, allowing the resurgent carrier to fly far more efficiently since emerging from bankruptcy last year. Instead of fighting the bankrupt company, GE was happy to have the jets back, because it was able to lease them for more money to carriers in China, India, Latin America, and Europe. The same thing happened when ATA declared bankruptcy in 2005; GE reclaimed 20 narrow-body jets and promptly leased them all to overseas carriers. "For as many planes as we have taken out [of the U.S. system]," says Henry Hubschman, president of GE Commercial Aviation Services, "we wish we could take out more."
That's a dramatic change from the days when the U.S. airline industry was the only real game in town. In the 1970s, for instance, U.S. carriers accounted for about 70 percent of the global airline market. Today it's just above 40 percent and drifting lower, says Kostya Zolotusky, a managing director of Boeing Capital, the airplane manufacturer's financing arm. That insulates Boeing-and many other suppliers-whose fortunes used to rise and fall in lock step with those of the major U.S. airlines. "We're having a spectacular year," says Zolotusky, "and the U.S. majors have not really participated at all."
With less pressure to hold on to unnecessary jets or fly unprofitable routes, the big U.S. airlines have been able to shrink from weighty megacarriers to more nimble and disciplined operators able to deploy their jets where the return is highest. United Airlines, which emerged from bankruptcy in February, has slashed its fleet from 626 aircraft six years ago to 411 today, according to Ascend, a London-based aviation consultancy. Other carriers have shrunk less; Zolotusky says Boeing has helped its U.S. airline customers "remarket" dozens of plane orders to overseas buyers.
Rebound. Overall, about 800 large jets have left the U.S. system since 2000. Some are older planes that were retired, but most are modern aircraft picked up by foreign carriers. Those cuts in the domestic system, and other tough measures, are finally paying off. After falling for several years, the amount of money earned for every seat in the air has surged. For the domestic routes of seven big airlines, this key indicator rose 6.2 percent in 2005, and it's up 14.3 percent so far in 2006. "That's the first time we've ever seen double-digit growth," says John Heimlich, chief economist for the Air Transport Association.
Heimlich predicts the industry will lose about $500 million this year but will be profitable in 2007. And while Northwest and Delta are still muddling through bankruptcy, some carriers are doing much better. United, for one, is likely to earn a healthy $300 million or more in the third quarter and post a modest profit for 2006, its first since 2000. Wall Street is smitten with the rosy outlook. The consensus recommendation for shares of all the big carriers not in bankruptcy-United, American Airlines, Continental, US Airways, and Southwest-is "buy," according to Thomson Financial.
The bumpy ride isn't over, though. Volatile fuel prices are a constant worry. With money back in the till, pilots at American, Southwest, and US Airways are pressing for pay hikes. Scarce capital has left most carriers with aging fleets that need to be modernized. And there's probably more consolidation ahead: United CEO Glenn Tilton has signaled that his airline is aggressively exploring merger possibilities. And with Delta and Northwest still teetering, there is plenty of prey for stronger operators. In the airline business, profitability should never be confused with stability.
This story appears in the October 16, 2006 print edition of U.S. News & World Report.