Airline Ills Outlast Last Resort

Mixed earnings results suggest the latest round of bankruptcy filings haven't done the trick yet.
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Maybe bankruptcy isn't so grand after all.

Despite bankruptcy's prevalence in the airline industry and the recent success of

US Airways

(LCC)

-- which filed for bankruptcy protection in both 2002 and 2004 -- it's becoming clear that, largely because of higher fuel costs, the recent round of legacy airline filings aren't yet curative.

First-quarter results reported last week were decidedly mixed for bankrupt carriers. United Airlines parent

UAL Corp.

(UAUA)

-- just months after emerging from three years under bankruptcy protection -- said it's back to the drawing board for $700 million more in annual cuts.

Delta Air Lines

(DALRQ)

cut its losses and said it will lose just $6 million in March, but performed badly relative to its peers.

Northwest Airlines

(NWACQ)

also cut its losses and, relative to its peers, performed well.

"Bankruptcy may work, but the emphasis is on the 'may,' " says aviation consultant Scott Hamilton. He notes that

Continental Airlines

(CAL) - Get Report

, like US Airways, needed two filings to get it right. And all of the industry's most spectacular financial failures -- the shutdowns of once-mighty Braniff, Eastern and Pan American World Airways -- were also preceded by bankruptcies.

At United, Delta and Northwest, Hamilton says, "The underlying problems are still debt, pension and costs, and it's too early to say whether those have been addressed."

"The bottom line is profitability," says Mike Miller, a consultant at The Velocity Group. "There is no other option. It can't be that we think someone might become profitable."

United

reported last week that it lost $306 million in the first quarter, about the same as it lost a year earlier despite a $314 million increase in fuel costs. The second-largest carrier said it needs $400 million in new cost reductions, in addition to the $300 million it previously announced. "If they still need to make cuts, then the bankruptcy was not successful," Miller says.

United's shares closed Monday at $33.83, down 15% from the $40 price

they opened for on Feb. 2 on the

Nasdaq

.

Profiting From Merger Innovations

At US Airways, a fortuitous merger between the old US Airways and America West Airlines led to huge

first-quarter increases in revenue per available seat mile (RASM), a result of beneficial comparisons with a year ago because of rising fares and reduced capacity.

The

US Airways merger was unique in that a low-fare, low-cost carrier took over management of a legacy carrier. In the past, legacy carriers have taken over lower-cost airlines, including California's AirCal, Western and PSA, but haven't retained their lower-cost advantages. US Airways shares have more than doubled since the carrier emerged from bankruptcy last fall.

Speculation is widespread that there will be additional industry mergers when Delta and Northwest approach the ends of their bankruptcies, since bankruptcy law would enable the carriers involved in a merger to shed unwanted assets such as aircraft leases, just as US Airways and America West did.

Decreased Capacity, Increased Outlook

Delta reported Friday that, excluding one-time costs primarily for restructuring, it lost $356 million in the first quarter, compared with a $684 million net loss a year earlier. The third-largest carrier has been operating under bankruptcy-court protection since September.

It raised hopes by noting that its March loss, excluding one-time costs, was just $6 million, and that its RASM rose by 12.5%, while its costs fell. Operating expense, excluding special items, was $4.1 billion, down 1.2%, despite a fuel-expense increase of $266 million. Excluding fuel and special items, mainline cost per available seat mile was 7.82 cents, down 1%. "There are some encouraging signs, but other airlines are still outperforming them on RASM," Miller says.

Delta is at the "bottom of the pack," says Merrill Lynch airline analyst Mike Linenberg in a recent report. "The carrier's results equates to a -9.6% pretax margin, ranking its March-quarter performance the worst among the carriers in our coverage universe," Linenberg writes. "Granted, the carrier is in bankruptcy restructuring, but we would have thought Delta would see some benefit from improving East Coast flows, especially to/from Florida in March." Merrill Lynch has no financial relationship with Delta.

Delta said that a strike threat by its pilots cost it millions of dollars in lost bookings in April, which raises questions about its April performance. Pilots are expected to begin voting on a new contract this week.

Northwest Airlines, the fifth-largest carrier,

reported Thursday that its first-quarter loss, after one-time costs, was $129 million, compared with a $450 million loss in the same quarter a year. Northwest said its fuel costs rose by $114 million, despite fleet reductions, while labor costs fell 30%.

"This year's net loss 'compared favorably' to last year's," writes Standard & Poor's analyst Philip Baggaley in a recent report. "Revenue gains (despite shrinking capacity vs. last year) -- due to an improving pricing environment industry-wide and reductions in labor and aircraft-ownership costs -- more than offset the negative effect from much higher fuel prices," he says.

Baggaley notes that "relative to its closest peer, UAL Corp., Northwest managed a narrower operating loss, reported comparable revenue statistics and had somewhat lower (better) operating-cost measures."

Meanwhile, Linenberg notes that Northwest's March-quarter operating margin of negative 0.5% was superior to Delta's negative 9.6%. "The gap is even more pronounced considering Northwest is seasonally challenged for the quarter, relative to Delta," he says.

Both Delta's and Northwest's bankruptcies are benefiting the industry because the carriers are shedding capacity. Northwest said it cut capacity by 10% from the same quarter a year earlier, as its fleet size decreased to 367 planes from 432 planes. Delta, meanwhile, cut capacity by 24%, from 841 planes to 638 planes.