US Airways lowers its earnings estimate

Industry is feeling empty-seat blues, analysts report

Airlines

June 09, 1999|By Robert Little | Robert Little,SUN STAFF

US Airways became the latest airline to lower its estimated quarterly earnings yesterday, reacting to modest ticket sales that have prompted several major air carriers to scale back growth and reduce fares as much as 25 percent.

In a letter to analysts and investors, the Arlington, Va.-based airline estimated second-quarter profit of $1.80 to $1.85 a share, down from an earlier estimate of $2.15 a share. It attributed the drop to "softer than anticipated" traffic in May and unexpected expenses.

US Airways is not alone. This week, United Airlines warned of weak second-quarter profit, and American Airlines said last month that its earnings would trail those of other carriers.

Analysts suspect that the passenger airline industry is feeling the strain of overzealous growth after several years of strong profits. New aircraft have been delivered faster than old ones are retired, filling the market with more available seats than the flying public is paying to fill.

"The underlying problem is that capacity is growing faster than demand," said Thomas Longman, an analyst for Arnhold & S. Bleichroeder Inc. in New York. "And, on top of that for US Airways, they're involved in some very fierce competition in some of their major markets." US Airways was recently displaced by rival Southwest Airlines as the top carrier at Baltimore-Washington International Airport, but it is still the dominant carrier in the Washington-Baltimore market. Its low-fare subsidiary airline, MetroJet, has helped stem losses in competitive Florida routes and is expected to become one-fourth of US Airways' operation.

The airline also reduced its growth forecast for fiscal 1999 yesterday, however, suggesting growth for the year of 6 percent, down from earlier forecasts of 7 percent. The company anticipates growth of 5 percent in the second quarter, 8 percent in the third quarter and 6 percent in the fourth quarter.

United Airlines announced yesterday that it would cut fares for off-peak summer travel by as much as 25 percent, and competitors -- American, Delta, Continental, Northwest and US Airways -- quickly matched them. The special fares are not as low as in previous years, and they come just as most airlines have increased base fares in pursuit of higher revenue, but were still seen as a sign that the airlines are not happy with their passenger levels.

"We're also seeing stronger consumer travel than business travel," said Goldman Sachs & Co. analyst Glenn D. Engel. "And, in the airline industry, business travel is the key to higher margins."

Lower ticket sales were not the sole reason for US Airways' revised earnings estimates. The company reported unanticipated expenses resulting from the resolution of labor contracts earlier than expected, and cited lingering transition costs from the implementation of a new computerized reservations system. Engel said US Airways' internal complications are exacerbating the strains felt industry wide. He predicts that second-quarter earnings throughout the industry will drop 15 percent to 20 percent compared with last year, but expects US Airways earnings to fall 25 percent to 30 percent.

"It's partly the industry and partly the company," said Engel. "When a company that has been contracting for years starts to grow, that is a very difficult transition. But also, supply picked up and demand didn't. Everyone is feeling that."

US Airways' shares fell $2.6875 to $48.875 yesterday.

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