By TERRY MAXON
Staff Writer
Published: 21 October 2013 09:45 PM
Updated: 22 October 2013 01:29 PM
The U.S. airline industry, not that far removed from financial disaster, is expected to post strong earnings when carriers report their third-quarter results over the coming days.
If they do, investors should thank fuel prices, which haven’t gone up, and operating revenue, which has. Industry analysts have been generally bullish as a result.
“We expect the airlines to report very strong earnings results in 3Q, with revenues beginning to accelerate, driven by improving pricing,” Cowen and Co. analyst Helane Becker said in an earnings preview Monday.
In an Oct. 10 report, Wolfe Research analyst Hunter Keay predicted “good reports for most airlines this earnings season,” with seven of 12 airlines he covers showing “solid margin expansion.” That means operating income as a percentage of revenue should increase.
The improvement, Keay wrote, is “due to a very favorable operating environment consisting of strong revenue and stable fuel prices.”
That’s a far cry from the middle of the last decade, when four major airlines at one point were in bankruptcy court, or the 2008-09 period, when soaring fuel prices brought billions of dollars of losses for the industry.
Instead, the five largest U.S. passenger airlines are expected to post a combined profit of about $2.8 billion for the three months that ended Sept. 30, excluding one-time charges and special items.
The same carriers earned just under $1.7 billion in third quarter 2012, excluding special charges.
Analyst Michael J. Linenberg of Deutsche Bank also expects improved results from the airlines this quarter. As he weighed where the improvement was coming, Linenberg saw revenue as a bigger factor than fuel prices.
While slightly lower fuel bills are providing “a modest tailwind,” he wrote, the “primary driver of our more optimistic forecast is better-than-expected revenue trends.”
American Airlines Inc. parent AMR Corp. led off the reports last week with blockbuster earnings of $530 million excluding special items, or $289 million with those charges.
But the industry leader is expected to be Delta Air Lines Inc., which reports its results Tuesday morning. Analysts’ consensus is that Delta will earn $1.36 a share, or nearly $1.2 billion.
That is close to double the anticipated income of United Continental Holdings Inc, parent of United Airlines Inc. Analysts are predicting that United will earn $1.54 a share, or just over $600 million.
If analysts are correct, Delta will also edge United as the largest airline in terms of operating revenue, at least for one quarter. The consensus is that Delta will report revenue of $10.47 billion, compared with $10.27 billion for United Continental.
US Airways Group Inc. follows Delta when it reports results Wednesday morning. Analysts predict that the carrier will earn $1.12 a share, or $233 million.
That is nearly as much as Dallas-based Southwest Airlines Co. is expected to report Thursday. Consensus is that Southwest will report net income of 33 cents a share, or about $238 million. Southwest is expected to report operating revenue of $4.53 billion to US Airways’ $3.48 billion.
But observers shouldn’t be surprised when the results come out from these airlines as well as smaller carriers JetBlue Airways Corp., Spirit Airlines Inc., Alaska Air Group Inc. and others over the next two weeks.
The general trend among analysts has been to raise earnings estimates as the quarter progressed.
Buckingham Research Group analyst Daniel McKenzie upped his estimate for Southwest last week by 2 cents a share to 34 cents. In a note Friday, McKenzie said that “we believe the U.S. airlines are poised to modestly better the Street when they report next week.”
“Of the bunch, Delta and US Airways appear most likely to surprise on the upside,” McKenzie predicted.
Looking ahead to the fourth quarter and early 2014, McKenzie also had an optimistic forecast, as capacity “remains benign” and “the demand outlook remains quite firm.”
“An improved outlook for corporate travel spend in FY ’14 and an improving economic backdrop drive continued growth in margins and earnings through next year in our models,” McKenzie wrote.