Why October Was a Messy Month for Airlines

The government shutdown and the debt ceiling crisis created big obstacles for airlines in October, as demand for last-minute bookings fell off a cliff at the beginning of the month. Airlines with a strong presence in the D.C. area were the worst hit.

However, when all was said and done, the month was not as bad as it could have been, just messy. The effects of the government shutdown were overwhelmed by other factors that affected the airlines' year-over-year performances. Let's take a look at how the five top U.S. airlines did.

Source: Airline press releases 

Three factors holding airlines back
The government shutdown depressed unit revenue at all of the major carriers, but particularly at Southwest, United, and US Airways, all of which have major operations in the Washington, D.C., area. Airlines with significant exposure to Japan -- particularly Delta and United -- also continued to feel a negative impact from the devaluation of the yen.

However, year-over-year comparisons were colored even more by Hurricane Sandy, which hit the U.S. in late October last year. Most of the airlines posted fairly significant capacity increases last month, but these were really an artifact of all the flight cancellations caused by Hurricane Sandy in October, 2012. Those flight cancellations boosted airlines' unit revenue last year, which created a corresponding drag on unit revenue gains this year.

The upshot of all this is that overall, the airlines' unit revenue statistics look worse than they really are. The average increase was in the low single digits, but might have been around two percentage points higher without all of the unfavorable comparisons.

A month of exceptions
That said, AMR and United had countervailing one-time effects that boosted their unit revenue numbers. Just a week before the end of October, United executives projected that unit revenue would decline by 2.5%-3.5% for the month. However, the carrier cited "larger than normal positive adjustments identified during the month-end close process" as an offsetting factor that brought unit revenue back to last year's level.

AMR's results last year were dragged down by a rash of mechanical problems that led to widespread delays. Some observers believe that American Airlines pilots deliberately began filing more maintenance reports than necessary to protest the company's attempt to cut their pay and benefits in bankruptcy court. Whatever the cause, American Airlines took a revenue hit last fall from which it is now recovering.

Putting it in perspective
All of the unusual factors impacting airlines' revenue results last month make it harder to sort out how each company is doing. After adjusting for the unusual impacts, American Airlines appears to have the best unit revenue numbers in the industry, but its advantage is smaller than the raw numbers imply. By contrast, United's revenue adjustment is masking the extent of its underperformance.

Investors should keep a careful eye on unit revenue results over the next several months to see if American Airlines maintains its momentum, especially with respect to United. American and United have competing hubs in the three largest U.S. metro areas (New York, Chicago, and Los Angeles). A shift in customer preferences toward American could therefore have a tremendous impact on the U.S. airline landscape.