BUSINESS

Delta, US Airways reduce flying and raise fares; post 2 straight years of annual profits

01/25/2012 08:10 EST | Updated 03/26/2012 05:12 EDT
Delta and US Airways are learning to stay profitable.

Both reported better-than-expected fourth-quarter earnings on Wednesday, capping two straight years of annual profits. By avoiding deep discounts on fares and unprofitable routes, the two carriers have done well even as fuel costs soar and the economic recovery remains fragile.

It's the same discipline that's helping the entire U.S. airline industry. Southwest last week reported higher earnings and said travel demand is strong. United Continental Holdings Inc. is expected to report a fourth-quarter profit on Thursday.

"We simply do not see any evidence of macroeconomic weakness in our business," said US Airways President Scott Kirby.

It was Delta's first back-to-back annual profit since 1999-2000. US Airways last reported profits two years in a row in 2006-2007.

Delta's stock price rose more than 6 per cent while shares of US Airways leaped 17 per cent.

Both airlines kept a lid on the amount of flying they did last year and raised fares 10 times, a high number of increases.

The same strategy appears to be in place for 2012. Delta plans to reduce flying 2 per cent to 3 per cent this year, maybe more. Airlines can reduce flying by cutting flights, eliminating destinations, or switching to smaller planes. US Airways said it will increase flying by only 1 per cent this year, mostly overseas.

Airlines executives have been saying explicitly that they aim for profits in good times and bad. That's a change from previous years, when they accepted losses during bad times and hoped to make up for it in boom years, said S&P Capital IQ stock analyst Jim Corridore. Part of that meant adding flights whether or not there was enough demand, just to grab business from competitors.

Now, "they're looking to make money first, before gaining market share," Corridore says.

That means cutting flying even though demand is up. "That's going to lead to higher fares," Corridore says. "It's a complete change in airline industry executive philosophies."

Delta said its biggest priority in 2012 would be keeping non-fuel costs in check. Raises are in store for former Northwest Airlines workers who came to Delta when it bought Northwest in 2008. Other costs have been rising, too. Delta said. CEO Richard Anderson said the company will try to cut costs by reducing maintenance expenses, increasing productivity, and renegotiating contracts with regional airline partners.

Delta's fourth-quarter profit totalled $425 million, up from $19 million a year earlier. Revenue rose 8 per cent to $8.4 billion, countering a 5-per cent rise in fuel expenses on its mainline operations. Other costs were flat. Delta is the nation's second-largest airline company.

US Airways Group Inc., the fifth-biggest airline, earned $18 million, down from $28 million a year earlier as fuel prices rose. Revenue rose 9 per cent to $3.2 billion.

Both companies' profits were better than analysts expected.

Delta's 2011 profit totalled $854 million, up from $593 million in 2010. Tempe, Ariz.-based US Airways earned $71 million for the year, down from $502 million in 2010.

Analysts surveyed by FactSet expect Delta to earn $1.86 billion this year, while US Airways is expected to post net income of $326 million.

Neither airline would talk about potential mergers with American Airlines, although US Airways Chairman and CEO Doug Parker confirmed that it has hired financial advisers to study the possibility. American, the nation's third-largest airline, filed for Chapter 11 protection Nov. 29.