Major U.S. airlines discover integration benefits
As the dust settles from U.S. airline mergers, American carriers will seek to further the integration benefits that helped them achieve record profits last year.
With less competition and a greater focus on managing the peaks and troughs of travel demand, airlines are fighting for profitability rather than market share. “I see this as a really good year for U.S. carriers,” says David Swierenga, president of Texas-based consultancy AeroEcon. “Controls on capacity will hold the line on costs, and with the forecast this year for fuel costs declining, the cost side of the equation looks good. And on the revenue side, traffic increases with an economy that is stabilizing or growing.”
Carriers generally reported positive earnings trends for 2013, with expectations for continued improvements this year.
' merger with Northwest Airlines, starting in 2008, went so well that it is touted as a benchmark. The carrier reported record earnings for 2013, and in the fourth quarter individually, and says revenue will get an extra boost this year through a joint venture with .
and Continental Airlines struggled to combine their systems and labor agreements after merging three years ago, but the carrier last year enjoyed its best fourth-quarter operating margin since 2010. expects to finish absorbing AirTran this year, which will likely provide a further lift to earnings.
and are just beginning the process of combining, after closing a deal on Dec. 9 to become the world's largest carrier. It has gone well so far, says American Airlines Group President Scott Kirby.
American's efforts are “a front and center focus for investors,” says Savanthi Syth, an analyst with Raymond James. “They have outlined a lot of synergies as well as revenue and cost, and the way they execute on that will be key to investors if they can avoid some of the pitfalls you saw with United.”
The combined carrier will realize synergies in revenues “almost immediately,” Kirby says, and the pace will accelerate through the year, with a third of a projected $1 billion coming from code-sharing. The airlines are already code-sharing on hub-to-hub routes and aim to roll out the rest by the end of February. The corporate and frequent-flier growth goals will take longer, according to Kirby.
American also plans to announce in the coming months “numerous other revenue opportunities” beyond the traditional synergies, he says. On a combined basis, the new carrier reported fourth-quarter revenue of $9.98 billion, an 8.7% increase, with operating income more than doubling to $288 million.
US Airways will leave theat the end of March and immediately transition into the Oneworld alliance with American.
“Customer Day One was on Jan. 7, and while we had some minor issues, we worked through those quickly,” Kirby says. “We're happy with the first piece of customer-facing integration.”
It has been “a pleasant surprise” to see how well the American and US Airways teams have worked together to merge operations, notes American CEO Doug Parker, especially since “it is no secret we came about this in different directions.”
Southwest, too, has its hands full completing integration work. Most of the physical integration of AirTran into Southwest will occur this year, says Southwest CEO Gary Kelly. “This time next year, the AirTran brand will be retired and it will be all Southwest.”
The carrier launched service beyond the 48 continental U.S. states last year—to San Juan, Puerto Rico—and is starting international sales this year, mostly by gradually absorbing AirTran's international route system into its own. American will consider new international markets next year. Operating income last quarter, excluding special items, was a fourth-quarter record at $418 million on revenue of $4.43 billion.
“I am especially happy with these results, considering that there's such a drag associated with integrating another airline,” Kelly says. “To have record results, knowing that there is a lot of work and inefficiencies underlying that is a huge accomplishment.”
Chief Financial Officer Tammy Romo adds that the airline has “some pretty meaningful opportunities to improve our cost performance as we get on the other side of the integration.”
United's earnings growth also improved throughout 2013, culminating in a fourth-quarter operating profit of $235 million on revenue of $9.33 billion, as ancillary revenue per passenger increased 15%.
“United finally seems to have gotten most of the hard work done, but it has still got another year of integration,” says Michael Derchin, an analyst at CRT Capital Group in Stamford, Conn.
Even Delta is not done with integration efforts. According to President Ed Bastian, new code-share revenues from Delta's partnership with Virgin Atlantic generated $25 million in sales over the last half of 2013, and that revenue stream will pick up this year, since the airlines moved into a full profit-sharing model on Jan. 1.
The partners represent 25% of the seats available between the U.S. and London's, which has piqued “significant interest” in corporate customers, particularly from the banking community in New York, Bastian says. The first coordinated schedule has been published and will go into effect in April, and the carriers are moving their facilities next to each other in New York and London to be more efficient.
Delta's revenue increased 6% last quarter to $9.08 billion, while operating profit nearly doubled to $701 million.
Even those not actively involved in mergers are looking at looser tie-ups to help earnings.and American have started talks about working together more closely, particularly on the West Coast, as Delta expands at Alaska's Seattle base.
“American and US Air's number one priority is integration with themselves and code-sharing on each other's metal as a new integrated entity,” says Andrew Harrison, Alaska's vice president of planning and revenue management. “With that said, this year, we will be finalizing how we are going to be working together.”
Partnerships with their counterparts in Europe helped American, United and Delta successfully navigate the European recession by trimming capacity through mid-2013, as demand declined, and then bringing it back up modestly in recent months, says Derchin.
“This was a real-life recent example, related to integration, of how the airlines were able to reduce capacity to keep load factors high, keep fares from collapsing and keep unit revenues going despite a recession,” he says. “They kept profitability in these markets growing a lot better than it would have been otherwise.”