Global Growth Beckons Airlines - TheStreet

Global Growth Beckons Airlines

First-quarter earnings results hint that the chase is on for international revenue.
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When low-cost carriers took over the airline industry in the decade's early years, legacy carriers couldn't even find shelter in their onetime fortress hubs. So they retreated to international markets, where low-cost carriers couldn't chase them.

This week, as first-quarter earnings reporting got under way, legacies could celebrate their revenge.

American

(AMR)

reported a first-quarter profit for the first time since 2000.

Continental

(CAL) - Get Report

reported a first-quarter profit for the first time since 2001.

Meanwhile,

Southwest

(LUV) - Get Report

, the largest low-cost carrier, had a quarter so strikingly unsuccessful -- at least by Southwest standards -- that it immediately announced a transformation plan.

Details of the plan are sparse, but it is hard to resist the notion that once it is implemented, Southwest will look a lot more like its legacy competitors.

Among the ideas CEO Gary Kelly mentioned on a conference call Thursday were assigned seating, international flying, in-flight entertainment and increased cargo sales -- underscoring the oft-repeated adage that there are no new ideas in the airline industry.

So far, the principal message of the first quarter's results is that domestic is not the place to be.

All you have to do is read the RASM numbers. American said international revenue per available seat mile grew 11.3%, led by the Pacific region, where RASM jumped 19.3%. Domestic RASM gained just 1%.

Continental said all of its international segments showed double-digit increases, led by a 14.4% rise in Latin America. Domestic RASM declined by 0.7%.

Southwest said its RASM grew by 1.4%. At least, Kelly noted, Southwest's domestic performance was better than its competitors'. And it should be noted that Southwest made a profit for the 64th consecutive quarter, something no other airline can say. But that profit fell by 48% from a year earlier.

On the Continental conference call, President Jeff Smisek cited "continued pressure on domestic pricing

that is mainly driven by the growth of low-cost carriers and their pricing structure in the domestic market." But Smisek noted that "despite the yield degradation, we expect to continue to grow our domestic networks" in order to feed international flights. That's because 43% of Continental domestic passengers connect to international flights.

Continental CEO Larry Kellner said 47% of the airline's mainline passengers fly internationally, the highest international share for a legacy carrier. He said Continental realized a decade ago that international travel growth would follow growth in global telecommunications, in trade with China and in NAFTA-related trade. Now, Kellner said, "Travel seems to be growing at a pace ahead of global economic development.

"You're seeing a maturing of the global economy," he said. "Communications is helping to drive it. You're seeing benefits to the airline business from the globalization of other businesses."

Meanwhile, JPMorgan analyst Jamie Baker issued a "domestic warning" Thursday, noting: "Let's not stick our heads in the sand -- there is a growing body of evidence that domestic demand is deteriorating." As a result, he said, most airline stocks are overrated, even the ones that fly internationally.

Later in the day, Baker downgraded Southwest to underweight from overweight. JPMorgan has a business relationship with Southwest that includes providing investment-banking services.