$1 billion loss for airlines expected

Airline analysts say one of their top concerns at the start of 2004 is that   the industry might slow its own recovery by adding capacity too quickly.

Major carriers begin reporting fourth-quarter earnings this week and are expected   to post more than $1 billion in losses, a significant improvement from the same   period a year ago, when the industry had roughly $3 billion in red ink.

Blaylock & Partners airline analyst Ray Neidl said Monday that the industry   did a "commendable" job of reducing nonlabor expenses in 2003, primarily   by using aircraft more efficiently, but he worries carriers may have become   too optimistic about their near-term turnaround prospects.

What he and other analysts fear is that the number of available seats will   grow too fast in 2004, negating the potential benefits of the anticipated increase   in passenger demand by putting downward pressure on ticket prices and profit   margins, or "yields."

Neidl predicted that industrywide capacity would grow 8 percent to 9 percent   in 2004, while Lehman Brothers airline analyst Gary Chase put the figure at   7 percent to 8 percent. Forecasts for increased passenger demand are in roughly   the same range.

Chase said in a report published Monday that "carriers have experienced   yield weakness, which we believe is due in part to capacity creep," or   growth.

Challenging year ahead

Chase said he expects a "very challenging 2004 in the absence of a meaningful   improvement in demand."

The factors underlying the anticipated $1.1 billion net loss in the fourth   quarter, according to Neidl, are weaker-than-expected holiday travel, higher   fuel costs and bargain-hunting by business travelers.

Neidl said he does not expect any of the hub-and-spoke carriers like American   and Delta to report a profit. In contrast, he anticipates low-cost carriers   such as Southwest Airlines, AirTran Airways and JetBlue Airways, as well as   some regional carriers, to be profitable, bringing total industry losses below   $1 billion.

For all of 2003, industrywide losses are expected to be between $5 billion   and $6 billion, according to industry officials. The industry lost more than   $9 billion in 2002.

James C. May, the chief executive of the Air Transport Association, the industry’s   main trade group, said last week he expects losses to come in at the low end   of that range, in part because carriers have reduced their annual expenses by   $10 billion.

Security, fuel costs high

Still, May said certain costs continue to weigh the industry down. Fuel is   the industry’s second biggest cost after labor and, with oil prices soaring   above $34 a barrel, carriers are feeling the pinch.

Another area of concern are the security costs — $2.50 per flight segment   — that the government passes along to travelers. These effectively diminish   the profit carriers reap on each ticket sold.

While air travelers have become more accepting of security-related delays,   May said the perceived "hassle factor" associated with flying is not   over "by any stretch of the imagination."

On Wednesday, Delta Air Lines, which lost $734 million in last year’s fourth   quarter, will be the first major carrier to report earnings.