Aviation AirTran, Southwest report profits for Q2 By Michael Fabey / July 27, 2009 Share 1 -- For months, executives of low-cost airlines have boasted that their business models are tailored to thrive in the current tough economic environment, in which cheaper fares can generate higher profits. As the airlines' Q2 financial results started coming in last week, those executives were mostly being proved right, with AirTran posting a quarterly profit of $78.4 million and Southwest reporting net income of $54 million. Meanwhile, the bigger legacy airlines didn't fare nearly as well. Delta reported a net loss of $257 million, while Continental lost $213 million in the quarter. United recorded a slim $28 million profit, but that was mostly due to noncash fuel hedge gains and certain accounting charges. Minus those exceptions, the airline's quarterly release noted, United lost about $323 million in the quarter. Bob Fornaro, AirTran's chairman, president and CEO, said that the secret to the low-cost carriers' success during the recession lay in keeping ticket prices down while remaining flexible with aircraft scheduling. "We've got the lowest cost structure of any large carrier in the industry, and we can make money at these prices," Fornaro told Wall Street analysts last week during the carrier's quarterly earnings call. "We've got a lot more flexibility right now due to our cost structure," he said. "Although I'd like to see fares a little higher, we can operate in a weak revenue environment, and over the years, we've had some of our best performances when the revenue environment has not been strong. As long as customers react to fare sales or moderate pricing, that's not a bad environment for us to operate in." Gary Kelly, Southwest's chairman, president and CEO, said that cheap fares, a known brand and large passenger volume can make all the difference right now. "It's just imperative that we keep our costs low so that we can support the low-fare brand," he told analysts during Southwest's quarterly earnings call. "We have one of the strongest brands in the world, and we carry more customers than any other airline in the United States. We are mindful of that and are trying to make choices here, even in the depths of this recession, that will take advantage of those very positive attributes." Still, even the low-cost carriers are feeling the pinch of the recession. All airlines lost more business travelers in the second quarter, cut more capacity and had to deal with distractions such as the H1N1 swine flu and seesawing fuel prices. While airline executives acknowledged there was little chance for recovery this year, they told analysts that advance bookings suggested the industry might have hit bottom. "But we don't know how long we will bounce along the bottom," said Jeffery Smisek, Continental's president, COO and director, who has been named to succeed Lawrence Kellner as CEO. Part of the uncertainty among executives springs from uncontrollable issues like the flu pandemic and the continued volatility of fuel prices. Delta attributed a revenue hit of between $125 million and $150 million to swine flu concerns, mostly in its point-of-sale Asia traffic. Southwest reported a $20 million loss due to flu worries, while both Continental and United estimated their flu-related losses at about $50 million each. "The H1N1 flu epidemic had an impact on demand in Latin America and the Pacific," said John Tague, United's COO, who was named president last week. "Large capacity reductions in the region reflect the pull-down in capacity to Mexico that we implemented after H1N1. We've begun to add the capacity back to Mexico, and we will be back at our full schedule by the end of the third quarter." Smisek said: "We are closely monitoring the impact of H1N1 in regions currently experiencing their winter season, such as South America, and in particular Argentina, where we have seen recent outbreaks. We will be responsive should we need to make temporary capacity adjustments in Argentina or other regions as the winter flu season sets in." Carriers can easily tweak capacity to compensate for flu-related losses, but adjusting operations to deal with rollercoaster fuel prices is another matter. While AirTran's fuel costs were down by more than half during the reporting period and Southwest's were down by more than a quarter compared with a year ago, the per-barrel price of fuel jumped by $20, to $70, between April and June. "Rising fuel costs during the second quarter and now into the third quarter are a huge concern," Kelly said. Flu and fuel aside, what's really keeping airline executives up at night is international and business travel. Carriers depend on those higher-fare passengers to raise yields and provide a steadier cash stream. "What is really hurting is the lack of international strength and the lack of business demand," said Arne Haak, AirTran's senior vice president of finance, treasurer and CFO. Southwest's Kelly said, "You look at our short-haul, more business-oriented, high-frequency markets and they are off across the country in alarming numbers." Kelly added, "The sudden collapse of the financial markets in September-October just spooked the whole world. And I've heard many experts describe this as a credit-induced recession. So it's fear. And it's followed through with companies cutting back sharply and consumers also cutting their spending simultaneously. To me it's as simple as that. It is a very deep recession; it was not anticipated by many. You're going to see the adjustments to that collapse rolling out over time." Not surprisingly, airlines are being cautious about interpreting their booking data too optimistically. "We have seen stabilization in business demand and, candidly, have seen a bit of an uptick," said Delta's CEO, Richard H. Anderson. "But I think it's very early to be trying to call that a trend, and we want to be certain that we are planning on the conservative side. "We are not in a position yet to call it a long-term trend," Anderson added. "We need to get past the end of August and get some visibility into the fall period and get a better view of what some of the macroeconomic indicators will be September through December."