December Air Traffic Snowed In - Analyst Blog

Airline traffic in the month of December was hurt by severe weather conditions across the U.S. and Western Europe. Profit for most of the airline companies was adversely affected as the companies canceled several flights due to the severe snowfall in December.

Airline traffic is measured in billions of revenue passenger miles (RPM), which means one mile flown by one passenger.

United Continental Holdings Inc. (UAL">UAL), the largest U.S. airline and the holding company for both United Airlines and Continental Airlines, reported a modest year-over-year increase of 1.4% to 17 billion in December traffic. Capacity (or, available seat miles) grew 2.3% year over year and load factor (percentage of seats filled with passengers) fell 70 bps year over year. The company expects 7.5% to 18.5% year over year increase in unit revenue for the month of December, measured by passenger revenue per available seat mile (PRASM), a key metric in airlines.

United Continental expects December snowfall will hurt fourth quarter profit by $10 million. We believe United Continental is well positioned for growth due to the improving demand for air travel, capacity cuts, industry leading unit revenue growth, fleet right-sizing, network optimization, hedging strategy as well as the merger benefits from Continental Airlines. However, we remain on the sidelines due to high unionization, time-taking integration process and competitive threats.

Delta Air Lines (DAL">DAL), the second largest U.S. airline, reported a 2.6% year-over-year traffic increase in December on a 3.9% capacity growth partially offset by a 110-bps decline in load factor. Domestic traffic inched up 0.5% year over year on a capacity increase of 1.2%, offset by a decline of 60 bps in the load factor to 79.6%. International traffic also increased 5.3% year over year primarily driven by an 8.1% capacity increase while load factor decreased 210 bps to 80.7%.

Delta Air Lines expects fourth quarter profit will be $45 million less due to severe winter conditions in the U.S. and Western Europe. The current Zacks Consensus Estimate is 27 cents for the fourth quarter, indicating a significant growth of 198.46% from December 2009.

We believe the successful integration of the Northwest merger, investments in new products and network, competitive cost structure, and an effort to strengthen the balance sheet will position Delta Air Lines to take advantage of the economic recovery. However, unionized labor, rising fuel price, leveraged balance sheet, and the company's continued investment in technology keep us cautious on the stock.

The low-cost carrier Southwest Airlines Co. (LUV">LUV) recorded an 11.3% year-over-year rise in December traffic on a capacity increase of 5.6%. The month's RPM increased to 6.6 billion from 6.0 billion in December 2009. Load factor grew to 80.4% from the year-ago level of 76.2%. The company expects PRASM to increase 5% year over year for December 2010.

Our current Zacks Consensus Estimate for Southwest Airlines is 16 cents for the fourth quarter compared with 10 cents in the year-ago quarter. If the company meets the Zacks Consensus Estimate, it would lead to a substantial increase of 60.83%.

We believe Southwest benefited even in a difficult operating environment and will continue to do so in the near future, with the strongest balance sheet in the industry, competitive strength, low costs, various revenue initiatives, and network optimization. The pending acquisition of fellow discounter AirTran Holdings (AAI">AAI) represents a unique opportunity for Southwest Airlines to expand its presence in key markets and yield healthy returns driven by synergies and benefits.

AirTran Airways, a subsidiary of AirTran Holdings, set new monthly records for the month of December. Traffic grew 2.7% year over year to more than 1.5 billion on a capacity increase of 1.1%. Load factor expanded 120 bps to 78.9% from the year-ago quarter. AirTran was less affected by the storms and completed 98.6% of its December flights.

December traffic for American Airlines, a wholly owned subsidiary of AMR Corporation (AMR">AMR), rose 1.8% year over year on a capacity increase of 1.8% and flat load factor. Domestic traffic inched up 0.5% on a 0.4% rise in capacity and international traffic upped 3.9% on a capacity increase of 4.0%.

US Airways Group Inc. (LCC">LCC) said that its traffic rose 6% to 4.9 billion RPM in December. Capacity upped 3.9% and load factor leaped 160 bps year over year to 80.4%.

We see continued and sustainable demand for air travel in the near to medium term. The worst is over for the airline industry as overall economic conditions continue to show signs of improvement albeit at a slow pace.

Currently, we maintain our long-term Neutral ratings on Southwest Airlines, Delta Airlines and United Continental Holdings.

 
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