Wall Street Discovers Airlines Make Money

Delta, American led the market Wednesday as newfound discipline invigorated airline industry.
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ATLANTA (

TheStreet

) -- Wall Street discovered Wednesday that the historically unprofitable airline industry may have changed dramatically.

Shares rose at every major carrier, led by an 13% gain at

American

(AMR)

, an 11% gain at

Delta

(DAL) - Get Report

and a 15% gain at

Hawaiian

(HA) - Get Report

, all of which reported

strong earnings

.

"This quarter's results are a watershed event not just for US Airways, but for the US airline industry," said

US Airways

(LCC)

CEO Doug Parker, on an earnings call after the carrier reported

record third quarter results.

"The airline industry is the industry recording record or near-record profits, while the rest of industry is not," Parker said. "We are producing record results at a soft spot in the market cycle." He ticked off the reasons, which include continuing consolidation, industrywide capacity discipline, new revenue sources from fees and management teams "focused on returns instead of market share."

"We need to prove to our investors and ourselves that this is real, this is sustainable," Parker said. "We at US Airways know exactly what we need to do to accomplish that."

US Airways shares rose 7% on Wednesday. For the year, the carrier has led the industry with a 123% share price gain.

Within the airline industry, the strong results surprised no one. For instance, veteran analyst Bob McAdoo of Avondale Partners has had

a buy on every major carrier

for months.

Mike Derchin of CRT Capital Group wrote recently that the industry will achieve a

profitable fourth quarter

for the first time since 2000. Derchin said his favorites are Delta,

JetBlue

(JBLU) - Get Report

and

United

(UAL) - Get Report

On the Delta earnings call Wednesday, J.P. Morgan analyst Jamie Baker asked CEO Richard Anderson to define the "discipline" that is considered the primary cause of the industry's success.

"It means that whatever growth you have in the business has got to be below GDP

growth and can't be at the expense of yield and

unit revenue improvement," Anderson said. "Keep up with demand

but don't worry about chasing share."

Another Anderson tenet, which probably doesn't make

Boeing

(BA) - Get Report

too happy: "Avoid big capital outlays if at all possible for modifications to equipment or buying new equipment ... We like having a big chunk of our fleet paid for and depreciated

because you don't have to make the monthly payment on the airplanes."

Baker also asked Parker to define discipline, and got a similar answer. "The history of our industry has been that crises forced discipline upon us, and when the crises subside, we tend to succumb to temptation" Parker noted. He listed several historic temptations, including adding too much capacity, increasing employee compensation too dramatically and failing to take unpopular actions such as charging baggage fees.

"I think it's dramatically different this time," Parker added. "I don't see the same sort of return to succumbing to temptation that we've had in the past."

-- Written by Ted Reed in Charlotte, N.C.

>To contact the writer of this article, click here:

Ted Reed

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