Strong earnings for Delta & American

A couple of thoughts on US airlines’ third quarter earnings season:

Delta Air Lines soaring. “We are pacing well ahead of our goals for 2013,” Delta CEO Richard Anderson said. “We expect to set an all-time profit record in 2013 and in turn improve on that in 2014.” Delta’s net profit through the first nine months of 2013 was $2.06 billion, more than doubling net income of $1 billion in the first three quarters of 2012, putting the Atlanta-based airline on pace to improve on 2012 full-year net income of $1.01 billion and 2011 full-year net income of $854 million.

Delta appears to be proving that a full-service international airline based in the US can achieve consistently strong financial results. According to Anderson, Delta had a 14% return on invested capital in the last 12 months. Yes, the usual caveat about Delta getting big help from US Chapter 11 bankruptcy laws must be mentioned. But Delta is far from the only airline to take advantage of such restructuring laws—in the US and elsewhere. And it has now been six-and-a-half years since Delta emerged from Chapter 11, so it is impossible to dismiss all of the current, day-to-day success the airline is achieving as merely the result of Chapter 11. 

Are American’s results too good? Speaking of Chapter 11, American Airlines parent AMR Corp., which is still operating under bankruptcy protection, earned net income of $289 million in the third quarter on a 6.2% year-over-year increase in revenue to $6.83 billion. The benefits of the Chapter 11 process can be seen in continuing cost cuts. For example, wages, salaries and benefits—the company’s second largest cost category after fuel—dropped 13.3% year-over-year in the third quarter.

Chairman, president and CEO Tom Horton noted that AMR’s third-quarter net profit excluding reorganization and special items was $530 million, which he characterized as the “highest quarterly net profit in American’s history.” These results provide ammunition, of course, for the US Department of Justice, which is adamant that American can successfully emerge from Chapter 11 as a standalone carrier.

As far as DOJ sees it, why does a company that earned more than half-a-billion dollars in a three-month period need to merge with another company? American’s answer is that the strong financials make it a much better merger partner (indeed, US Airways wouldn’t have wanted to merge with a pre-Chapter 11, cost-laden AMR) and the combined size of US Airways/American will enable it to have the scope to more directly compete with Delta and United Airlines. The merger is not a matter of survival but a long-term necessity to remain fully competitive in the US market.