For more than a year, airline investors have been waiting -- not very patiently -- for American Airlines (AAL 1.76%) and United Continental (UAL 1.10%) to stem a series of steep unit revenue declines. Quarter after quarter, executives at the two legacy carriers have pushed back their forecasts for when unit revenue would start to improve.
However, the long-awaited recovery appears to be taking hold. On Tuesday morning, American Airlines and United Continental both reported that unit revenue came in better than expected last month. Considering that Delta Air Lines (DAL 0.43%) also saw a solid sequential unit revenue improvement in September, it appears that the U.S. legacy carriers are finally on the right track.
Delta delivers better results in September
On Delta Air Lines' Q2 earnings call, management boldly proclaimed that unit revenue trends would improve dramatically in September relative to July and August.
August turned out even worse than initially expected, largely due to Delta's technology outage during the month. However, Delta's unit revenue trajectory did improve significantly last month, as promised. Passenger revenue per available seat mile (PRASM) declined just 3% in September, compared to a 7% drop in July and a 9.5% decline in August.
American and United also see big improvement
Common factors such as GDP growth and industry capacity have a big impact on revenue trends for all three legacy carriers. Thus, given that Delta saw a big sequential PRASM improvement during September, it was reasonable to expect similar strength from its peers.
American Airlines and United Continental do not report unit revenue on a monthly basis like Delta. As a result, it's not possible to make a direct comparison of the sequential unit revenue improvements at each carrier. Nevertheless, it is clear that American and United delivered solid revenue results in September.
On Tuesday, American Airlines reported that revenue per available seat mile (RASM) declined about 2%-3% year over year in Q3. By contrast, management had initially projected that RASM would decline 3.5%-5.5% for the quarter. Even just a month ago, American expected to record a 3%-5% Q3 RASM decline. To move beyond the high end of that forecast range, American must have posted very strong revenue results last month: possibly even a return to RASM growth.
Meanwhile, United Continental reported that PRASM fell 5.5%-6% for Q3. That represented the high end of its original guidance range, which called for PRASM to decline 5.5%-7.5%. The company stated that close-in bookings for September came in better than expected, "driven by the timing of certain holidays."
A good sign for the fall?
Thus, unit revenue trends seem to have improved sequentially at all three legacy carriers last month. Looking forward to Q4, that's very good news, as it suggests that industry pricing discipline is starting to return. The recent rebound of jet fuel prices and slowing industry capacity growth should also support airlines' efforts to cut back on discounting.
Indeed, as long as air travel demand doesn't hit another air pocket in the next few months, it seems reasonable to expect airlines' Q4 unit revenue results to be roughly in line with their September performances. For Delta, that suggests a low-single-digit unit revenue decline. Based on United's positive remarks about September demand, a low-single-digit decline there also seems likely.
American Airlines looks like the big winner. Between the windfall from its new credit card deal, a sharp slowdown in capacity growth, and an improving macroeconomic picture in Brazil, American Airlines has a legitimate shot at returning to unit revenue growth this quarter.