What's RASM Got to Do With It?

OK, enough about mergers, alliances and other pseudo living-together arrangements that the airlines seem hell-bent on pursuing of late.

Today, as we look at only two weeks left in the quarter, it is time to look at some very strong revenue trends in the sector that should boost earnings results for the quarter.

First, and foremost, the Air Transport Association issued the May revenue-per-available-seat-mile, or RASM, figures for the industry late on Monday. The news? Outstanding. Almost better than sex. The industry posted an 8.9% year-over-year increase in revenue per available seat miles.

For new readers, just a bit of background as to what revenue per available seat mile is.

RASM is the amount of revenue that an airline generates divided by all the potential seats that are available for purchase at any given point in time. It is the most widely used indicator of an airline's ability to manage effectively the harrowing and oftentimes confusing practice of revenue management. You know, that inexact science that tries to predict how many fliers will fly which routes at what price at any given point in time.

Until Monday, most of the analysts who cover this industry had been forecasting that the sector would turn in a RASM figure for May that was up about 4% to 5% over the May 1999 figure. It was pretty apparent that a number of factors were pointing the industry in a positive revenue direction: Traffic was continuing to outstrip new capacity, and with three fare increases this year, it seemed that fares were poised to hang tough.

Sunday night, Sam Buttrick, analyst at PaineWebber, must have had an apparition of bigger things on the revenue horizon, as he issued a note Monday morning raising his RASM forecast to 7%. Tuesday morning, the industry produced its best revenue numbers since the third quarter of 1990 with the 8.9% figure. The airlines with the best RASM performance in May? AMR (AMR:NYSE - news - boards), parent of American Airlines, and UAL (UAL:NYSE - news - boards), parent of United Airlines. The poorest performers? US Airways (U:NYSE - news - boards) and TWA (TWA:AMEX - news - boards). We also need to note that the Air Transport Association's RASM calculation includes results from the 10 major airlines, with the exception of Southwest Airlines (LUV:NYSE - news - boards), which does not participate in the process.

Just a note here. Remember that American Airlines, which is in the process of removing two rows of coach seats from each of its aircraft, is automatically increasing its RASM performance, as this seat removal process reduces capacity at the airline.

The Bottom Line

So, what does all this mean, in terms of second-quarter performance for the sector? What it means is that Buttrick has already raised his second-quarter estimates for a number of airlines, and says he could raise them again, if indications continue to show June revenue coming in fairly strong.

I know, I can hear you now: "But Holly, what good is all of this if the price of jet fuel continues to rise?" To put this level of revenue performance into context, these numbers show us that the industry, overall, is now keeping ahead of the rising price of fuel. Granted, that is a generalization. Some airlines are going to fare better than others, depending on their fuel-hedging policy. We'll revisit who's hedged and who has not in our next column.

While the last two weeks of any quarter usually produce a flurry of analyst tweaking -- with this strong revenue performance in May -- there is no doubt that we should see analyst estimates increased across the board for the sector as a result. How much they are increased will depend, to a great extent, on the guidance the airlines give as to how June stacks up.

Preliminary estimates for June RASM performance are hovering around 5%. However, as is always the case, we won't know what the RASM was for June until the middle of July. In the meantime, unless revenues simply fall apart in the next two weeks, we expect the month to finish on a strong note.

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Holly Hegeman, based in Barrington, Rhode Island, pilots the Wing Tips column for TheStreet.com. At time of publication, Hegeman held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. You can usually find Hegeman, publisher of PlaneBusiness Banter, buzzing around her airline industry Web site at www.planebusiness.com. While she cannot provide investment advice or recommendations, she welcomes your feedback at [e-mail].