US Airlines Post Big Quarter, Shares Surge

Major US airlines accelerated their recovery in the summer travel season and reported strong profits on impressive revenues, sending the sector's shares higher on optimism for the remainder of the year.

Delta Air Lines and US Airways beat forecasts and American Airlines parent AMR delivered its first profit since the third quarter of 2007, excluding items.

"The industry has continued to rebound as business travel has continued to improve over the past year," said Matthew Jacob, an analyst with Majestic Research. "Many of the airlines have done a good job of streamlining their costs and improving their margins."

US Airways' USD$240 million profit was a record for the airline in the July-to-September period, traditionally the industry's busiest.

Airlines responded to higher fuel prices in the quarter with fare increases that helped them post double-digit revenue gains, despite a sluggish US economy.

Delta shares shot up nearly 11 percent, AMR rose 10 percent and US Airways was up 8.7 percent. The shares of United Continental Holdings, gained 7.2 percent. Southwest Airlines rose 4 percent.

United Continental, formed in the merger of United parent UAL Continental, will report its results along with Southwest on Thursday.

The outlook for the sector is positive amid rebounding travel demand and tight capacity, which allows carriers to charge more for tickets.

Analysts expect airlines overall to further cement their turnaround, although fuel prices and an uncertain US economy could soften bottom lines. Gains associated with increased international travel could weaken somewhat because of costlier fuel.

"We think improved profitability will drive expanded valuations for (Delta) and other US legacy airlines," said Standard & Poor's analyst Jim Corridore.

The air traffic recovery is also giving a boost to plane manufacturers such as Boeing, which also topped Wall Street profit views on Wednesday.

OVERSEAS FLYING, BAG FEES

American and Delta benefited from strong international results. Most carriers also had strong revenue from bag fees and other ancillary passenger charges in recording profits for the second straight quarter.

Airlines do not break out luggage fees separately, but a sampling of data collected by the government shows carriers made about USD$275 million in bag fees in September alone.

Delta said demand should continue into the holiday season and added its global network is generating revenue gains that should help produce its first profitable fourth quarter in a decade.

Since buying Northwest Airlines in 2008, Delta has focused on cutting debt, boosting passenger amenities and expanding service to higher-growth markets.

Delta commentary suggested "there's some more upside to be seen in the fourth quarter," Jacob said.

Atlanta-based Delta had net income of USD$363 million for the third quarter, compared with a year-earlier net loss of USD$161 million.

Total passenger revenue was up 19 percent at USD$7.7 billion, while fuel costs were up 3 percent.

Excluding special items, US Airways' third-quarter profit was USD$1.23 per share, beating forecasts by 6 cents. The carrier's revenue rose 16.9 percent and chief executive Doug Parker promised in a statement to continue aggressive cost management. Business travel on US Airways was up 23 percent, making up for less robust revenue from leisure customers. Fuel costs rose 15 percent.

US Airways did not give profit guidance for the fourth quarter, but forecast significant year-over-year revenue growth.

Parker, a proponent of consolidation, does not envision near-term merger prospects for the airline, but told analysts there was "a lot of room" for investors to benefit without additional industry consolidation.

Although American's staff costs are high and fuel costs were up 11 percent, the airline posted a quarterly profit of USD$143 million. American's revenue was up 14 percent at USD$5.8 billion.

American said it would increase daily departures from Los Angeles by 28 percent to 153 flights a day. It is planning new routes to Asia, including service to Shanghai, and nine new domestic markets in spring 2011.

Questions persist about American's strategic direction. American had fallen behind rivals in traffic and has trailed major rivals, which have been making money now for the past six months.

Industry experts say American needs a partner, although the airline has long maintained it does not need a merger mate to compete, saying it can offer corporate clients access to markets that are important to them.

For instance, American and Japan Airlines received US government approval earlier this month for closer co-operation on transpacific routes. Earlier this year, American won clearance for a similar deal with British Airways over the Atlantic.