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Industry Analysts See 1988 as Another Profitable Year for U.S. Airlines

December 30, 1987|From Reuters

NEW YORK — U.S. airlines, whose service problems led to a sharp rise in consumer complaints in 1987, enjoyed a profitable year despite all the negative publicity.

Industry analysts said that, given modest economic growth, airlines should have another good year in 1988.

For travelers, they said, air fares are expected to stabilize around current levels, although they said that fares could decline again if airlines pass on the benefits of lower fuel costs due to a drop in oil prices.

Most analysts agree that the worst performer this year was Texas Air Corp., which in February merged People Express and New York Air into its Continental Airlines unit and was still digesting its purchase in 1986 of Eastern Airlines. "Texas Air was clearly a disappointment," said analyst Jim Vail of Eberstadt Fleming.

The Houston-based airline, the nation's biggest air carrier, had trouble absorbing all of its acquisitions. Earlier this year, analysts had predicted that it would post strong earnings, but they now predict equally large losses. Texas Air earned $42 million in 1986.

"The disappointments were Pan Am and Texas Air. But in general, the industry did very well (in 1987)," said analyst Louis Marckesano of Janney Montgomery Scott in Philadelphia.

Pan Am Corp., which lost $463 million in 1986, has cut its losses and is expected to post a much smaller deficit this year.

Excluding weak performances by Texas Air and Pan Am, the airline industry's operating profits should double to between $2.3 billion and $2.6 billion from $1.2 billion this year, analysts said. The airlines' profits reflect a 10% increase in passenger traffic this year and higher fares.

Some analysts said results could have been even better. "Some earlier projections will not be met because the first quarter was hurt by fare wars," said Vail of Eberstadt Fleming.

Analysts said service problems, publicized delays and other annoyances also held earnings back. In the first nine months of the year, passenger complaints to the government nearly quadrupled to 35,128, according to the Transportation Department. The airlines all reported an increase in near mid-air collisions, highlighting the growing concerns about air safety.

Critics of airline deregulation, including some members of Congress, say the new rules and the shortage of air traffic controllers have increased the danger and reduced the service in air travel.

Those concerns, however, did not dent profits at several companies. USAir Group's performance exceeded expectations for 1987, analysts said, while Delta Air Lines Inc. and NWA Inc., parent company of Northwest Airlines, should post earnings close to earlier projections.

Some analysts said Allegis Corp.'s United Airlines did well this year, turning its newly acquired Pacific routes around, while others said it surrendered too great a market share to competitors.

AMR Corp., the parent of American Airlines, has reported disappointingly low earnings, analysts said. "The industry as a whole sold its product too cheaply through the peak (summer) months," said an American Airlines official, who asked not to be identified. "We kind of squandered the summer peak in that sense."

In a recent report, Michael Armellino of Goldman Sachs said lower fuel costs, reflecting falling oil prices, and prospects for continued economic growth should help airline profits next year.

Analyst Marckesano said the industry's operating income in 1988 could exceed $2.7 billion, while Mark Daughtery of Dean Witter Reynolds said he was looking for around $2.4 billion. Both estimates assume a sluggish economy. "We're looking at a good, but not great year," Marckesano said.

The industry has been consolidated in a series of mergers and Pan Am may yet lose its independence.

A tentative deal to merge the Pan American World Airways unit with Braniff Inc. has fallen through. But another group, Towers Financial Corp. and its Towers World Airways affiliate said they may bid for Pan Am.

Analysts say Pan Am, which is seeking concessions from its unions to cuts costs, could run short of cash in the first quarter of next year.

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