Airlines Report a Mixed Bag in Latest Quarter - TheStreet

Airlines Report a Mixed Bag in Latest Quarter

The questions investors are asking now are basic: Is the downward cycle over? Can we safely jump back in, knowing that the worst is behind us?
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All the major airlines have now reported earnings for the third quarter, so let's

compare the big boys' operational results to see if we can glean any tidbits for potential stock movements come the millennium. As longtime readers know, we usually place more importance on the operational stats that an airline posts than on per-share results.

As far as we are concerned, operational indicators, such as yield and RASM, are much more indicative of how well an airline is doing financially than earnings per share. For those of you unfamiliar with the terms, yield refers to the amount of money an airline makes on the seats that are actually sold. RASM -- revenue per available seat mile, or unit revenue as it is often called -- is the money that an airline makes, taking into consideration all seats that are available for sale. Big difference. And yes, the RASM figure is the one that the industry revenue management chieftains monitor on a constant and rather fanatical basis.

Combine that with the load factor, which is the relationship between an airline's seating capacity vs. the number of seats actually sold, and presto, you have the operational building blocks of the airline revenue equation.

So, while the rest of the market frets over possible interest-rate hikes and the latest economic news from Washington, airline investors should be paying close attention to carriers' RASM performance. While this information is telegraphed by the airlines to a certain extent, the

Air Transport Association

reports the actual numbers about 20 days after the close of the month. So, come Nov. 20 or so, we'll find out how the airlines did in October.

However, we usually don't have to wait that long.

Case in point is now. Several major airlines are indicating to me that RASM is up for October, and that the trends they see going forward are looking good. This month is crucial. The questions investors are asking now are pretty basic: Is the downward cycle over? Can we safely jump back in, knowing that the worst is behind us?

Well, two things. As we said, there are indications that the airlines are improving RASM figures. In addition, reading between the lines,

Continental Airlines

(CAL) - Get Report

, in its conference call two weeks ago, indicated that it would probably decrease the rate of capacity growth for 2000. As overcapacity, especially on the trans-Atlantic routes, has been primarily responsible for falling RASM, this news is welcome. (Continental did not give specifics at the time, but it appears that the airline will accelerate the retirement of DC-10 aircraft, replacing them with smaller 767 aircraft.)

Merrill Lynch

analyst Michael Linenberg told

Bridge News

that the investment firm was encouraged by this change at Continental.

"This is good for the industry," said Linenberg, whose firm also believes that Continental will drop back in terms of frequency on specific flights, in addition to changing aircraft allocation.

So, against this backdrop, we present our comparison of how the majors performed for the last quarter.

Our comments? Since we've been talking about the revenue side of the equation, and not harping on about costs, which we usually do, let's keep on the revenue track.

Note that we had only four major airlines post gains in both yield and RASM for the quarter. Of those three, in our estimation,

UAL's

(UAL) - Get Report

United Airlines

performed the best of the majors. Why? While United's increases in RASM and yield were not as great as those posted by

America West

(AWA)

and

Alaska Airlines

(ALK) - Get Report

, note that United posted only a 3.3% increase in CASM, or costs per available seat mile. Alaska slid off the charts, posting a 9% increase in CASM, and AWA posted a more moderate 4.7%. Overall, we give the nod to United.

Comparing RASM figures on a per-region basis (trans-Atlantic, Pacific, domestic, etc.), United also took the prize for the big four, in our estimation. Both

Delta Air Lines

(DAL) - Get Report

and United posted gains in sector RASM.

AMR's

(AMR)

American Airlines

did not post a gain in RASM in any subgroup, and in fact posted the second-biggest decline in RASM of any major with the exception of

US Airways

(U) - Get Report

.

Before we go on, a few comments. One, we are not even talking about

Northwest

(NWAC)

this quarter, because that airline's numbers are so skewed by the strike during the third quarter of 1998. So, forget Northwest. All we can say is that the airline seems to be doing better with its Pacific routes, which, considering these account for some 30% of its revenue, is good news.

As for US Airways, the numbers say it all. A horrific 4.5% drop in yield (the second-worst among the majors), in addition to an astounding 8.8% drop in RASM (the worst of all the majors). With those results, one needn't look any further at the quarter's results to know that the airline is not performing well -- at all.

As for

Southwest Airlines

(LUV) - Get Report

, the news is a bit harder to dissect without more information. The airline's yields were flat, but RASM increased by 1.7%. Respectable performance for an airline that also grew some 11% for the quarter.

Southwest, which lives and dies by its costs, saw its CASM up 4%, primarily because of an unhedged fuel situation that we all knew about two months ago. Our take on the results for Southwest? Take out the fuel increase, and real earnings were still up about 13%. And in this environment, we'll take that.

TWA

(TWA)

? Is the airline trading bait or an acquisition target? We think at this point, we'd place our bets on the former. The airline posted yet another loss this last quarter, and it also posted the highest drop in yield of any major carrier. And get this, this was after the airline flew 10% more passengers. RASM for the airline was down 3.5%, and costs were up 2.3%. Not good.

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

hhegeman@planebusiness.com.