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January 20, 2005

Except Southwest, airlines continue to reel

Several major airlines reported quarterly earnings yesterday, and the reports continue to verify what everyone already knows -- the legacy airline business model is broken and in need of such serious reorganization that it is questionable whether many can or should survive.

While American Airlines parent AMR Corp. and Northwest Airlines reported another round of large fourth-quarter losses, even industry profit leader -- Dallas-based Southwest Airlines -- reported a 15% profit decline. That Southwest's profits are declining underscores the grim outlook for the entire industry -- of the 10 largest U.S. carriers, only Southwest is expected to report a fourth-quarter profit.

Houston-based Continental Airlines, Inc. reported a fourth quarter loss of $206 million. Continental is implementing a plan to generate $1.1 billion in savings and expand its more profitable international flights. The carrier is also negotiating $500 million in worker wage and benefit concessions that it needs to have in place prior to the end of the first quarter of 2005 to help defray further losses.

All airlines carriers are being hammered by an unusual combination of high fuel prices, fare competition and growing seat capacity in the U.S. market. Had it not been for fuel hedges that saved Southwest $174 million in the quarter, it also would have reported a quarterly loss.

Meanwhile, the other discount airlines that have generated the brutal low-fare competition are also being stung by declining fares as quarterly losses are expected from America West Holdings Corp., JetBlue Airways, AirTran Holdings Inc. and Frontier Airlines. THe primary reason that the other discounters are not profitable is that they do not have the liquidity of Southwest to hedge fuel costs.

Southwest's quarterly profit fell to $56 million (or seven cents a share) from $66 million last year. Revenue totaled $1.66 billion, which was an increase of about 9% compared to the fourth quarter of 2003. Southwest's unit costs in the quarter fell 1.3%, or 4.5% excluding fuel.

With several airlines wallowing in chapter 11 cases without clear reorganization plans, is 2005 the year that the needed shakeout in the airline industry will take place?

Posted by Tom at January 20, 2005 5:50 AM |


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