Sunny Skies Ahead for Delta and US Airways?

Almost literally, optimism is in the air for both Delta (NYSE: DAL  ) and US Airways (NYSE: LCC  ) . The two rivals both reported 3Q earnings that were significantly higher on a year-over-year basis. Although those net profit blasts were largely due to accounting gains, the companies' forecasts for the remainder of the year anticipate a pair of smooth and happy flights.

Fueled by fuel hedging
For Delta, the 3Q's profitability was boosted enormously by artificial gains thanks to the way it prices its fuel hedges. That was a considerable adjustment, pumping net profit by about $440 million to $1 billion. If the hedges and other one-offs were removed from the equation, bottom line would have come in at around $768 million.

That's $0.90 per share, down ever so slightly from 3Q 2011's result. The former figure, in addition to the $9.92 billion in revenue for the quarter, was more or less in the ballpark of analyst expectations.

Those aren't amazing results, but peering into the cabin a bit reveals a particularly nice number occupying a first-class seat. The company's expenditures for fuel -- nearly always an airline's No. 1 cost item and concern -- dropped significantly, by 23% year-over-year.

That's admirable considering that the spot crude oil price actually grew by nearly that number over the same span of time. Fuel hedging isn't only doing wonders for the bottom line; it's having a very beneficial effect on real costs.

Other figures aren't quite so pretty but at least they've inched up. Passenger load (i.e., the average occupancy of the airline's flights) stood at 86.4%, a slight rise from 3Q 2011's rate. The company also managed to make more with less; that $9.92 billion in revenue was a 1% rise in annual terms, on the back of a reduction in fleet from 790 planes to 725.

Not the best time to fly?
Delta's encouraging, if somewhat buried, numbers were overshadowed by those of US Airways (UNKNOWN: LCC.DL  ) , which also reported on its 3Q around the same time. Like its rival, US Airways posted a huge net increase inflated by one-offs (such as a slots transaction with Delta).

But even without those ever-so-special items, the company's gain was rather impressive, reaching a record $192 million. This was a cool 153% year-on-year climb from 3Q 2011. That's $0.98 per share, against analyst expectations of $0.92. Revenue largely came in as anticipated, at $3.53 billion.

A good quarter is arguably more crucial for US Airways than it is for Delta, since the former has been itching to merge with the nearly crippled American Airlines (NASDAQOTH: AAMRQ.PK) for quite some time. That seemed like a fading possibility not long ago, when American's business was recovering and it began making noises that it could emerge from bankruptcy and function as a stand-alone entity.

Since then, however, the carrier has had a few embarrassing, high-profile stumbles (watch those loose seats!) and its business has suffered. The combination of that and US Airways' decent showing in the quarter seems to boost the chances for a tie-up of the two companies.

Encouraging forecasts
It's generally been a good quarter for air carriers. Even the permanently clumsy American Airlines did well before those seats started coming loose.

Not only are the incumbents reporting improvements; budget carrier Southwest (NYSE: LUV  ) , for example, also did reasonably well, and has reported improving metrics for October (admittedly, against a weak September). Looking further ahead it should benefit from the continued integration of its 2011 acquisition, AirTran, and the introduction of flights on lucrative Latin American routes.

Spirit Airlines (Nasdaq: SAVE  ) also has reported good recent numbers, with a big boost in September's revenue passenger miles (i.e., the total number of miles flown by paying passengers; a key statistic in the industry). Revenue passenger miles saw a year-over-year increase of nearly 30%,which compares very favorably to both Delta and US Airways and provides hope that the airline's soon-to-be-released 3Q results will be positive.

Since nearly every plane in the sky, it seems, has had good news to report, the incumbents are bullish on the rest of the year. Delta expects to be "solidly profitable" in the fourth quarter, according to company president Ed Bastian. The company also pointed out that its quarterly survey of corporate travel managers strongly indicated that in the fourth quarter, on a year-over-year basis, businesses will shell out at the same rate or higher for travel expenses.

US Airways pointed to the more casual traveler as a driver of revenue going forward. In the company's quarterly analyst conference call, president J. Scott Kirby said that the company was seeing strong demand from the leisure segment, concluding that this is usually a good harbinger of success. Considering that, Kirby said "we'd feel reasonably good about the economic outlook for 4Q and into 2013".

Those are ambitious words. If raw fuel prices continue to slide as they've been doing in recent days and that expected demand materializes, such prognostications might come true. Keep your eyes on the skies, airline watchers.

Fuel prices are trending down at the moment but some experts think they might reverse course and head up again. In advance of that possibility, it's a very good idea to read The Motley Fool's "3 Stocks for $100 Oil." You can get free access to this special report by clicking here.

Eric Volkman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On October 25, 2012, at 2:57 PM, Shakinthefat wrote:

    A positive comment from the Mötley fool about other airlines besides the Darling Southwest Airlines...has hell frozen over too?

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