Weekly Airlines Note: United, Delta, American And US Airways

The past week saw release of airline passenger traffic reports for the month of August. Here we discuss the same for six U.S. airlines under our coverage with a focus on demand environment across markets. During the week, American Airlines also received approval from bankruptcy court for its proposed merger with US Airways (NYSE:LCC). Now, the only impediment in the American-US Airways merger is the trial brought by the Department of Justice (DoJ) that is set to begin from November 25 later this year.

August Traffic Reports – Delta, United, US Airways, Southwest, Alaska And JetBlue

During the month of August, the overall demand for flights was robust with strong growth from Latin American markets and moderate growth from Atlantic and domestic U.S. markets. The healthy demand environment allowed most carriers to raise their flying capacities to drive growth in their passenger traffic. At the same time, unit revenue – amount collected from each passenger for a mile of flight – increased for all six airlines – Delta, United, US Airways, Southwest, Alaska and JetBlue – in August driven by the positive demand environment.

Delta‘s (NYSE:DAL) August traffic reports confirmed its shift to a growth oriented capacity stance from a conservative capacity stance followed over the last few years. In August, the carrier raised its flying capacity by over 3% annually, with maximum expansion on Latin international routes followed by Atlantic international and domestic routes. ^[1] The Latin routes witnessed significantly higher demand for flights driven by the fast growing economies of that region, while trans-Atlantic international routes to Europe saw moderate improvement in demand in August.

Delta’s larger rival – United (NYSE:UAL) – lowered its flying capacity during August in an attempt to fly fuller planes and thereby raise its profitability. United which acquired Continental in 2010 – two years after Delta acquired Northwest – is still rationalizing its flying capacity, a standard feature of airline integration. However, we figure that like Delta, United too will shift to a growth oriented capacity stance in the not too distant future as its occupancy rates – percentage of seats occupied by passengers – have risen to the levels of Delta.

Additionally, yen devaluation impacted returns of both United and Delta on Pacific international routes. This factor, however, did not weigh on US Airways‘ (NYSE:LCC) August traffic as it does not fly trans-Pacific to Asia. US Airways benefited from the positive demand for flights in all its markets – Latin, Atlantic and domestic. In particular, the strong growth in demand from Latin markets allowed US Airways to raise its flying capacity by over 5% annually in August, driving 5.6% annual growth in its passenger traffic. ^[2]

Southwest (NYSE:LUV) due to its largely domestic network was faced with a moderate growth environment. Accordingly, the carrier could raise its flying capacity by only around 1% y-o-y in August. ^[3] However, its passenger traffic fell marginally. We figure Southwest’s relatively small international footprint will prevent it from benefiting from the strong growth on certain international routes especially Latin international routes. However, in the long term as the carrier builds a sizable international network, its dependence on moderately growing domestic market will decline.

Smaller carriers including Alaska (NYSE:ALK) and JetBlue (NASDAQ:JBLU) continued to raise their flying capacities at 7%-8% annually in August in an attempt to occupy a larger share of the market. ^{[4] [5]}

Overall, these statistics support the view that the U.S. airline industry is likely to maintain its profitability for the foreseeable future after suffering from severe losses for a large part of the last decade.

American-US Airways Merger

Separately, the judge presiding bankruptcy proceedings of American Airlines gave approval for the carrier’s merger with US Airways on Thursday, September 12, citing support from all major stakeholders including debt holders of American, shareholders of US Airways, and the boards and unions of both companies. Now, the only barrier to the American-US Airways merger is the trial with the Justice Department that is set to begin from November 25.

In August, the Justice Department moved court blocking the proposed merger citing customer interests. The department contends that the proposed merger will lower competition, increase air fares and reduce options for customers. US Airways and American, on the other hand, say that their merger will provide customers with an alternative to Delta and United. The carriers also contend that their merger will provide customers with an expanded service network and thus increase their options. (See Airline Stocks Dip As The Justice Department Blocks US Airways-American Merger)

The trial which is expected to last around 10 days will determine if American Airlines will come out of bankruptcy as the largest airline in the world or have to spend many more months in bankruptcy coming up with an alternate plan.

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1. Delta reports financial and operating performance for August 2013, September 4 2013, www.delta.com [↩]
2. US Airways reports record August load factor, September 5 2013, www.usairways.com [↩]
3. Southwest airlines reports August traffic, September 9 2013, www.swamedia.com [↩]
4. Alaska Air Group reports August operational results, September 5 2013, www.alaskaworld.com [↩]
5. JetBlue Airways reports August traffic, September 12 2013, www.jetblue.com [↩]