Crowded planes are filling the bank accounts of U.S. airlines.
Wall Street analysts expect domestic carriers, including Fort Worth-based American Airlines Group, to post hundreds of millions of dollars in profits when second-quarter earnings are announced this week.
“[Airline travel] is surprisingly strong, on mostly business demand, relative to consumer GDP which is really lackluster,” aviation consultant Robert Mann said.
American, now the largest airline in the world, is also expected to have the largest profit among U.S. carriers. The company will report its second-quarter financial results on Thursday.
Airlines surprised analysts when May traffic reports showed fuller planes and solid growth in unit revenues — a key financial statistic in the industry. Company stocks rose to their highest point this year.
However, the stocks pulled back in July as international carriers like Air France-KLM and Lufthansa began warning investors that profits for 2014 might be down because of increased competition on trans-Atlantic flights as Persian Gulf carriers like Emirates Airline and Etihad Airways continue to expand.
Analysts say the domestic market has remained strong, with Alaska Airlines and Dallas-based Southwest Airlines, which both fly primarily within the U.S., expected to post solid earnings this week.
“International may have softened in some regards following an unusually strong May due to excess capacity, but overall demand is still positive,” Wolfe Research analyst Hunter Keay said in an investor note.
Who’s in the money
With fuel prices stable so far in 2014, all of the domestic airlines are expected to post profits in the second quarter.
Wall Street analysts, who take out one-time accounting charges from earnings, have raised their earnings estimates for several carriers in the past few weeks.
Helane Becker, of Cowen and Company, told investors last week that it’s likely that Alaska, American and Southwest will beat Wall Street estimates.
“American has a history of exceeding expectations,” Becker wrote in a research note. “Southwest and Alaska generate the majority of their revenue and income in the U.S. domestic market, and that market saw solid [unit revenue] gains” in the second quarter.
Analysts say United Airlines is still working through merger integration issues but appears to have turned the corner since it joined with Continental Airlines in 2010. Delta Air Lines disappointed investors earlier this month when it said June’s unit revenues were softer than May’s, but is still expected to report profits around $875 million for the quarter.
Regional carriers, like Republic Airways and Skywest Airlines, have had problems staffing their flights with pilots, which could affect their second-quarter earnings.
“I think everybody is still getting accustomed to [the new pilot flight time duty rules] and it’s still showing up in lower completion factors and poorer on-time rates than we would have expected otherwise,” Mann said. “You can blame it on the weather, but we had worse weather last year.”
Bullish on American
Six months out of bankruptcy, Wall Street analysts like what they see from the new management team at American.
Shares (ticker: AAL) are up 70 percent since it merged with US Airways in December. According to FactSet Research, analysts estimate the carrier will post a second-quarter profit of $1.93 per share, not including one-time items, or approximately $1.3 billion.
American “is our favorite network airline,” Keay said. “We continue to expect [American] will grow earnings and expand margins faster than the rest of the industry.”
The airline expects to log about $600 million in one-time accounting charges due to bankruptcy and merger items and from selling its fuel hedging contracts. Without the fuel hedging contracts, the airline will save money when the price of jet fuel goes down but will pay more when prices increase. American’s new executive team, most of whom came from US Airways, did not use fuel hedges while running the Tempe, Arizona-based airline.
American “is in the early stages of merger integration but so far things appear to be progressing relatively smoothly,” said Michael Derchin, an analyst with CRT Capital Group, in a research note. “IT and labor integration will be the big tests next year.”