May 08, 2007

Future no longer looks promising for US Airways

New headwinds are once again threatening to roil US Airways and the rest of the ever-volatile, always-cyclical U.S. airline industry. It was only three months ago that Tempe, Ariz.-based US Airways boasted about the $303 million it made in 2006, its first profitable year since 1999, and the belief, as expressed by Chief Executive Officer Doug Parker, that, "we are doing better than our competitors and we are widening the gap."

But that was before the failure of a bid to acquire rival Delta Air Lines, the arrest of Parker for drunken driving, protests from unhappy unions, bad weather that temporarily closed a Philadelphia hub and a reservations-systems meltdown that stranded thousands of passengers up and down the East Coast.

Now analysts are downgrading the entire industry, citing lower demand and higher fuel prices. And two big US Airways rivals, Delta and United Air Lines, are out of bankruptcy and competing anew with a lower-cost structure and lower fares, just as a twice-bankrupt US Airways did in 2005 when it merged with America West Airlines.

US Airways had the post-bankruptcy airline market to itself for more than a year. During that period, it ramped up operations, grabbed market share and made a heck of a lot of money.

It's now clear those salad days are over. "You're no longer able to see what you've seen in the last couple years -- increases in revenues," Parker told analysts last week after reporting a first-quarter profit of $66 million (up 2 percent) and warning about slowing revenues and increased competition. "And this comes at a time when fuel costs are increasing. What you're seeing is that it is flattening, making it more difficult to raise prices as costs go up."

Just in the last week, two major brokerages -- UBS and J.P. Morgan -- pulled back their bullish predictions about airline stocks, citing higher fuel prices and a slowing economy, which could further affect demand from travelers.

A slowing economy "has the same kind of effect on the airline industry as the aging process does on a human anatomy," said airline analyst Bill Lauer.

Moreover, rising fuel costs will exceed US Airways' 2007 predictions by $300 million, the airline said last week.

Still, it expects to make money in the second quarter and for the full year. But not without some pain. Given the new competition from a leaner Delta and United, US Airways can no longer rely on customers to pick up the costs of rising fuel prices in the form of higher fares.

"This cost increase pretty much falls to the bottom line," Parker told analysts.


No comments: