Airlines Land on Downward Trek

Fourth quarter earnings across the airlines industry fell below expectations, but some analysts warned that high yield investors could expect an even bigger shortfall later in the first quarter.

"The fourth quarter is in line with my expectations, but we started warning people last week on this industry. You're going to have to be very selective going into the first quarter," said Lee Shames, airline and aerospace analyst at Deutsche Banc Alex. Brown.

While all the carriers experienced revenue growth throughout 1999, earnings-per-share fell below analysts' expectations, according to FirstCall/Thomson Financial. The news sent stock prices plummeting, and bonds traded down as well. Spreads on Continental Airlines' and Northwest Airlines' outstanding debt, for example, widened about 20 basis points during the week.

"It was a tough year to begin with: lots of capacity came on and yields until the end of the year were not doing much, even before fuel costs started rising. And the fourth quarter is seasonally slow; you lose leisure travel and you had two weeks of Y2K issues going into January," Shames said.

Regional carriers like Southwest Airlines and America West, however, outperformed most major and international carriers, including United Airlines, in the fourth quarter and in year-end earnings figures.

"The regionals don't have the baggage of the international market," said Shames. "The domestic market is pretty good."

Southwest Airlines reported 1999 earnings up 9.4%, with a yearly net income of $474.4 million, up from $433.4 million in 1998. Its fourth quarter earnings of $93.8 million were down from the year-ago period of $100.4 million.

The airline made a $256 secured debt offering during the fourth quarter to end the year with $418.8 million in cash and an unused bank facility of $475 million.

America West reported record fourth quarter revenue of $552 million, up from $493 million in the same time period in 1998. Annual revenue for 1999 was up 9.1% to $2.1 billion.

For United Airlines, fourth quarter net earnings reached $129 million, compared to net earnings of $54 million in the fourth quarter of 1998. Full-year net earnings reached $1.24 billion, up from $821 million in 1998.

For some names, however, increased revenues may not translate into a brighter first quarter. Canadian Airlines is going through a period of restructuring while Trans World Airlines maintains a very limited cash balance. One airline analyst called these two "very precarious names in the marketplace with regards to public debt."

Across the board, quarterly earnings were adversely affected by significantly higher fuel prices.

"All of them are paying for it. Nobody could hide from it," said Shames.

For Southwest, jet fuel cost per gallon increased 55.8%, from 43 cents in fourth quarter 1998 to 67 cents in 1999. Currently, jet fuel costs hover around 79 cents per gallon for the airline.

"Airlines tend not to be able to fend off these short-term spikes. Over time, fuel and yield tend to keep step - this is a short-term aberration," said Shames.

Some were able to hedge against rising fuel costs. America West reported a savings of $11 million in the fourth quarter from the company's fuel hedging program. Three airlines, American Airlines, Continental Airlines and United Airlines, instituted a $20 surcharge on domestic tickets last week to offset rising fuel costs. Analysts do not expect oil prices to trend down until after the OPEC meeting on March 27.