The winter can be a frustrating time to fly in cold-weather areas. There are few things in life more discouraging than getting stuck overnight at the airport after your flight has been canceled, trying to sleep in a chair or -- if you're lucky -- a rickety cot! Meanwhile, you could be missing an important meeting or a long-awaited vacation.
While winter storms can be aggravating and costly for fliers, they can also cause big financial losses for airlines. Big network carriers are in the best position to weather the storms, because they're geographically diversified and can route many customers through their other hubs.
On the other hand, weather-related cancellations can take a huge toll on geographically concentrated airlines like JetBlue Airways (NASDAQ:JBLU) and regional feeder airlines like Republic Airways (NASDAQ: RJET) and SkyWest (NASDAQ:SKYW).
A horrible winter
Last month, thousands of travelers were stranded across the continent as severe snowstorms and frigid temperatures snarled airline operations. JetBlue was forced to cancel large swaths of its schedule over the course of several days, leaving some customers stranded in the Caribbean for as much as a week. Other airlines faced smaller but still significant disruptions to their flight operations.
February hasn't brought any improvement. Halfway through the month, airlines are on pace to cancel as many flights as they did in January (or more). This week alone, airlines have canceled more than 15,000 flights in the United States.
The cost of delays and cancellations
Storm-related cancellations are never good for airlines, but they're not always disastrous. When an airline cancels flights, it can save money on fuel and crew labor. On the other hand, the airline has to pay the rent or mortgage for its airplanes whether they're flying or not, and it may need additional airport or call center staff to handle rebookings. Most importantly, planes or crews may end up in the wrong place, forcing airlines to spend money repositioning them.
When all these pluses and minuses are added up, airlines usually save some money. But there's a catch -- the airlines are also giving up revenue as they cancel customers' flights. The net impact depends heavily on how much of that revenue they can "recapture."
For example, United Continental (NASDAQ:UAL) canceled lots of flights at its Newark and Washington, D.C., hubs this week. However, it was probably able to rebook many customers on flights through its nearby hubs in Chicago or Cleveland.
At the affected airports themselves, the ability to recapture revenue depends on how full flights are in the days surrounding a weather event. Load factors (the percentage of seats filled by paying customers) have been rising in the airline industry, making rebooking more difficult. However, in weaker demand periods, airlines may be able to recapture most of the lost revenue, thereby minimizing their losses.
The regional airline dilemma
Regional airlines, which partner with legacy carriers to serve lower-demand routes with small jets and turboprops, are a special case. First, they tend to be paid on a fee-for-departure basis. If a flight gets canceled, they have no opportunity to recapture that revenue. Second, their legacy carrier partners set the schedules, so regional airlines have little to no control over their fates during a severe weather event.
Third, regional airlines fly small planes over relatively short distances. When a legacy carrier can only get a few flights out, it will usually keep its large mainline aircraft flying and cancel its regional partners' flights. This causes regional airlines to bear the brunt of most winter storms.
The cost of the storms
SkyWest, the largest regional airline company in the U.S., reported last week that the cost of winter storms through the first six weeks of 2014 would reduce the company's pre-tax profit by $24 million. For comparison, SkyWest earned less than $100 million of pre-tax profit in all of 2013.
A few bad storms have thus had a devastating effect on SkyWest's profitability. That loss estimate doesn't even include all of last week, when SkyWest's two operating subsidiaries had to cancel nearly 2,000 flights. Republic Airways, another large regional airline, hasn't provided a Q1 outlook yet, but it's also likely to see a big impact from winter cancellations.
The winter storms will also affect Q1 profitability at legacy carriers like United. The timing of this year's storms has been unfortunate. The first big storm of 2014 came during the busy travel period right after New Year's Day. This week's storm hit on the eve of Presidents Day weekend, making it difficult to rebook passengers in a timely fashion. Still, the losses should be relatively small for the largest airlines compared to a full year of earnings.
JetBlue represents an in-between case. It was the worst hit of all the airlines during the first storm of the year, which forced it to cancel around 1,800 flights. JetBlue estimates that the storm cost it $45 million in revenue and $30 million in operating income. This week's storm could cause additional -- but smaller -- losses. On Thursday, the worst day of the storm, JetBlue canceled 266 flights, representing 31% of its schedule.
For comparison, JetBlue earned pre-tax income of just $23 million in Q1 2013, although its full year pre-tax income was $279 million. This suggests that storm-related costs will limit JetBlue's ability to improve Q1 earnings. The impact on full-year earnings will be noticeable, too, but it shouldn't be enough to stop JetBlue from delivering strong earnings growth in 2014.
Foolish bottom line
When severe winter storms force airlines to cancel thousands of flights, it can have a noticeable impact on their earnings. Many of the larger airlines are estimating net impacts totaling tens of millions of dollars. That said, the top four U.S. airlines are each expected to earn at least $1 billion in pre-tax profit this year, so losses on this scale are manageable.
For smaller carriers, the financial losses can be more significant. In JetBlue's case, the cost of winter storms is aggravated by its lack of geographical diversification: The majority of its flights arrive or depart from Boston or New York.
However, the regional carriers are undoubtedly the worst off when severe weather strikes. These airlines are subjected to the operational decisions of their legacy carrier partners, and can be stuck with many of the costs of flight cancellations without any way to recapture lost revenue. This can have a severe impact on the bottom line.