Low-cost airlines win in October

Traffic fell for United Continental and other large airlines, while discounted carriers saw gains.

By Zacks.com Nov 9, 2011 3:19PM
Discounted airlines picked up more passengers in October as corporate travel budgets remained constrained and the economy continued to sputter.

Some of the nation's largest airlines, however, saw traffic levels drop.

October traffic fell 5.1% at the largest U.S. airline, United Continental Holdings (UAL). International and domestic traffic slid 4.4% and 6.3%, respectively. Capacity (or available seat miles) decreased 3.4% year over year and load factor (percentage of seats filled with passengers) decreased 150 basis points (bps).

Airline traffic is measured in billions of revenue passenger miles (RPM), which implies one mile flown by one passenger.

United Continental expects a 9.5% to 10.5% year-over-year increase in unit revenue for the month of October, measured by passenger revenue per available seat mile (PRASM), a key metric in airlines.

October traffic for the second largest U.S. airline, Delta Air (DAL), declined 3.8% to the lowest levels since January 2010. Domestic and international traffic fell 1.6% and 7%, respectively, a result of a 3.1% year-over-year decline in capacity. Since traffic fell faster than capacity, the carrier’s load factor registered a decline of 60 bps.

However, the low-cost carrier Southwest Air (LUV) recorded an improvement in October traffic, outpacing capacity expansion. The carrier recorded a 3.5% year-over-year increase in October traffic on a capacity increase of 4% largely because of more passengers.

The month’s RPM increased to 8.7 billion from 8.4 billion in October 2010. Load factor fell to 81.4% from the year-ago level of 81.8%. The company expects PRASM to increase approximately 6% year over year for October 2011.

The discounted U.S. airline JetBlue Airways (JBLU) reported a 15.7% year-over-year traffic growth in October 2011, the highest among its rivals. On a year-over-year basis, capacity climbed 13.2% and load factor grew 180 bps to 82.6%.

October traffic for American Airlines, owned by AMR Corp. (AMR), dropped 1.1% year over year resulting from a 0.7% capacity pull back. Load factor declined 30 bps. International traffic remained flat and domestic traffic fell 1.8% year over year.

Amidst fuel price worries, capacity pullback, souring fares and a debt crisis surrounding the U.S. and European economies, the low-cost carriers seem to be winning the battle in the industry. Given their lower operating costs, these carriers remain successful in attracting passengers in the domestic market despite the current economic volatilities.

Though fuel-price hedging and capacity reductions have brought some relief for large carriers, the determining factor for infusing profitability in these cost-struggling carriers would still be traffic growth.

We are currently maintaining our long-term Neutral rating supported by the Zacks #3 Rank (Hold) on United Continental, Delta, Southwest Airlines and JetBlue. AMR Corp. retains a short-term Hold rating with the Zacks No. 3 Rank.

Read the full analyst report on "LUV"
Read the full analyst report on "AMR"
Read the full analyst report on "JBLU"
Read the full analyst report on "DAL"
Read the full analyst report on "UAL"
Zacks Investment Research

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