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Cost cuts are a stabilizer for U.S. airlines

Steps taken amid oil's rise have domestic carriers better positioned than their rivals abroad.

September 23, 2009|Julie Johnsson

They couldn't have known it at the time, but United Airlines and other U.S. carriers were dealt a lucky break last year when an oil shock made it appear they were headed for bankruptcy.

Overseas rivals, who were shielded from stratospheric fuel costs and the collapse of the U.S. dollar at the time, are now months behind the U.S. airline industry in dealing with the aftereffects of the global economic crisis that started as fuel prices fell, analysts said.

International carriers such as Germany's Lufthansa and Air France-KLM are starting to lay off workers and trim routes as it becomes evident that lucrative international business flying will be depressed for the foreseeable future.

But U.S. airlines are ahead of the game as a result of the steep cuts that carriers started to enact by early summer 2008, when oil seemed headed to $200 a barrel, analysts said.

"It prepared the legacy carriers to dramatically lower costs more than they would have otherwise, and it probably kept a couple of them out of bankruptcy," said Vaughn Cordle, a former airline pilot who is managing partner and chief analyst for AirlineForecasts.

Of course, U.S. airlines still aren't flying clear of the economic turmoil that followed Wall Street's meltdown, analysts said. But benefits from their restructuring are starting to become evident in data released this week by the Bureau of Transportation Statistics.

Chicago-based United Airlines, which cut its workforce more deeply than most of its peers, has seen dramatic improvement in its cost structure, federal data show.

United, a unit of UAL Corp. and the nation's third-largest carrier, cut 5,600 full-time workers, or 11% of its workforce, in the 12 months preceding July 2009. Northwest Airlines Corp. was the only carrier to cut a larger percentage of workers -- 12.5% -- as it was absorbed by merger partner Delta Air Lines Inc.

United's unit costs, a measure of how much it pays to fly passengers, dropped 22% to 12.2 cents per seat mile during the second quarter of 2009, the lowest among network carriers.

The bad news for United: Its revenue, once the highest in the industry, tumbled in proportion to its costs and is now among the lowest of large carriers. Still, United reported a positive operating margin of 4.3% in the second quarter and an operating profit of $172 million, its first such gains in more than a year, BTS data show.

The seven largest U.S. carriers reported an average negative operating margin of 0.5%, according to BTS. That's not exactly robust, although it is a big improvement from the collective 6.3% negative margin the carriers reported during the year-earlier period.

The improved results have sent U.S. airline shares soaring since early July, but analysts caution that a full rebound for U.S. carriers won't occur until 2010 at the earliest.

"They've been poised [to rebound] for years," said Roger King, an airline analyst at CreditSights Inc., noting that carriers have cut tens of billions of dollars since the Sept. 11 terrorist attacks without achieving strong earnings. "They're still hurting on fuel, and there's nothing they can do about that. They're hurting on the global economy, and there's nothing they can do about that."

Business travel revenue, a key driver of profit, was down 35% to 40% in July for carriers around the world, the International Air Transport Assn. estimates. The trade group estimates that carriers globally will lose $11 billion in 2009.

"They're still in the woods," said Cordle of U.S. carriers. "But they're out of the 'defaulting on debt covenants' woods."


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