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Airlines ride new fees, cost cuts to big profits

Delta, American and U.S. Airways kick off what is expected to be a bountiful earnings season for U.S. carriers, despite passenger disgruntlement.

October 21, 2010|By Hugo Martín, Los Angeles Times

Airlines' profits are soaring again — thanks to baggage fees, planes packed to near-capacity and other measures that are beefing up the bottom line but also triggering more complaints from passengers.

Three of the nation's largest airlines — Delta Air Lines, American Airlines and U.S. Airways — reported unexpectedly strong earnings Wednesday, and the rest are expected to post profitable results this week. That would mark the first time since 2007 that all the major U.S. carriers have been in the black.

"It has been the perfect storm of demand increasing while capacity has remained pretty low," said Matthew Jacob, a senior analyst at New York-based Majestic Research.

The airlines pulled off the rebound by collecting millions of dollars in new fees for luggage, blankets, reservation changes and other services, industry analysts say.

And despite rising passenger demand, the carriers are generally not bringing back the jets they took out of service during the recession, instead packing more people onto each flight.

Passengers appear to have noticed.

Complaints filed with the U.S. Department of Transportation have been increasing for months, and were up 35% in August compared with the same month last year.

"Airline executives have been, and will continue to be, tone deaf to the increasing customer dissatisfaction with the airline industry," said Brandon Macsata, executive director of the Assn. of Airline Passenger Rights, a Washington-based nonprofit group.

For Mary Cardas, a business consultant from Newport Beach, the hassles of flying are beginning to outweigh the benefits.

"Waiting areas are loud and overcrowded and security is unpleasant. Add to that the natural weather delays that are inevitable between here and where my family lives," she said, referring to her parents in Oregon. "Quite frankly, I'd rather stay home."

Cardas, however, would probably be in the minority, according to Robert Herbst, an independent airline analyst and former airline pilot. Herbst points out that airline fares are so low that most people are still willing to put up with the added fees and crowded planes.

Airline representatives, meanwhile, play down the increased number of complaints, saying they represent feedback from a fraction of the overall flying public. They also attribute the increase to a new website and electronic complaint forms introduced in the last year by the Department of Transportation, which make it easier for travelers to grouse.

"I don't think we should draw a conclusion from a bunch of numbers in a very small sample," said Tim Smith, a spokesman for American Airlines.

Other statistics show some improvement in airline services.

The rate of passengers involuntarily bumped from flights dropped by about 25% in the April-through-June quarter, compared with the same period last year, and the rate of lost or delayed luggage dropped by 15% in August, according to the Transportation Department.

The three airlines that issued quarterly earnings data Wednesday reported combined profits of $746 million and double-digit revenue gains for the three months that ended Sept. 30 compared with the same period last year.

Delta Air Lines Inc. said it earned $363 million in the third quarter, compared with a loss of $161 million in the same quarter last year.

AMR Corp., the parent of American Airlines, reported third-quarter income of $143 million, its first profit in three years. That compared with a loss of $359 million for the year-earlier period. It also announced plans to add 33 new flights from Los Angeles International Airport, including new service to Shanghai and nine domestic airports, starting April 5.

U.S. Airways Group reported $240 million in earnings, marking the most profitable third quarter in the company's history. It swung from a loss of $80 million.

Airline analysts expect the nation's other major airlines — Southwest, JetBlue, United, Continental and Alaska — to report similarly rosy results.

Investors have been bidding up the price of most big airline stocks; shares of U.S. Airways have gained 127% since Jan. 1.

Herbst said the single biggest factor in the industry's improved financial picture is that demand for airline seats has increased but capacity has remained flat.

"They are basically selling every seat," he said.

The nation's airplanes flew on average 87% full in July, the highest level in a decade, according to the Bureau of Transportation Statistics.

The airlines' profit margin also was bolstered by fees charged to passengers for extra services at the airport and in flight.

From April through June, the nation's largest airlines collected $893 million in baggage fees, $594 million in reservation change fees and $618 million in other charges, such as for transporting unaccompanied minors and shipping pets, according to the Bureau of Transportation Statistics.

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