US airlines are expected to report solid profits for the third quarter, thanks to steady demand and fuel prices that declined toward the end of the period, but signs of slowing growth could spell challenges for the rest of the year.
Unit revenue decreased at many carriers in September. In addition, the number of passengers boarding planes at most big US airlines fell, as travel started its seasonal slowdown in the month.
"The revenue environment appears to be softening a bit," said Ray Neidl, an aerospace analyst with Maxim Group. "People will be looking to see if these trends continue into the fourth quarter."
The earnings reports kick off next week, with American Airlines reporting on Wednesday, followed by Southwest Airlines on Thursday.
The third quarter is traditionally strong for airlines as it includes the benefit of some summer travel. Among the five major US airlines, all are expected to report profits. AMR, currently undergoing restructuring in bankruptcy, is expected post its first profit after seven quarters of losses.
But other companies' earnings might not fare so well, potentially hurting airlines' revenue from business travel at the end of the year, said Robert Mann, an airline consultant.
Earnings at S&P 500 companies as a group are expected to fall 2.9 percent in the third quarter from a year earlier.
"Third quarter earnings (generally) will probably come in under expectations and that will start to show as fourth quarter travel plans being cut back," Mann said.
He said uncertainty over the outcome of the US presidential election and fear of shocks to the economy, should Congress fail to act to avoid nearly USD$600 billion in tax increases and spending cuts set to take effect by year's end, could also threaten growth at airlines.
"As long as nothing gets done, there is some concern about the nation's fiscal cliff issue and possible impact on high travel-spending industries," Mann said.
Mergers, ticket price increases and the trimming of unprofitable routes have helped airlines recover from the 2008-09 downturn. Carriers have also cut back flying to match demand, created new revenue streams with baggage and food fees and pared the number of seats sold at deep-discounted rates.
Those moves have proved to be a winning formula in keeping profits coming in the face of unpredictable fuel prices.
"People have figured out that holding the line on (capacity) growth is how you squeeze the average revenue per mile up, and that's how you prepare for the potential that fuel might be a little higher next year," said Robert McAdoo, an airline analyst at Imperial Capital.
KEY REVENUE METRIC WEAKENS
However, weakness emerged in the typically strong quarter. In August and September, unit revenue weakened for many major airlines. United recently estimated that measure fell 3.5 percent last month compared with September 2011, when it had growth of between 11 and 12 percent.
Savanthi Syth, an airline analyst with Raymond James, said unit revenue would not be as strong as it was in 2011 because fuel price increases have not prompted the level of airfare rises taken last year. In recent years, airlines have been raising fares to cover rising fuel costs.
In 2011, airlines took nine fare increases, compared with six so far this year, according to FareCompare.
"If you're not pushing through fare increases, your year-over-year growth is going to be less," Syth said.
Meanwhile, passenger demand has been stable, Syth said.
David Fintzen, an airline analyst with Barclays, said he expects unit revenue to improve in the months after September, which was tough for many airlines because a stronger 2011 made comparisons difficult.
"I think October's probably a better month than September," Fintzen said.
