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AirTran Posts Q1 Profit as Other Airlines Struggle With Economic Recession

Locations in this article:  Philadelphia, PA

Down arrowAs airline after airline released gloomy first quarter financial reports this week showing near-ubiquitous losses, AirTran Airways flew against the wind and posted a $28 million gain.

The airline managed to earn a profit, its first since 2007, despite a nine percent drop in revenue.

Chief executive Bob Fornaro attributed the airline’s gains to a smart fuel-hedging strategy, capacity cuts of eight percent, lack of exposure to overseas routes, and “ancillary” fee revenue which nearly doubled compared to Q1 of 2008.

Fornaro said that the company moved quickly last autumn to extricate itself from costly fuel hedges in order to take advantage of the rapidly-falling price of jet fuel. And even though it represented a reversal of its growth strategy of the past few years, AirTran’s decision to cut capacity paid off by helping it to fill more seats than ever on each plane.

Many analysts were surprised that a discount carrier such as AirTran was able to beat out not only bigger legacy airlines such as American, Delta and Continental in the profit stakes, but also the previously-profitable Southwest. Even JetBlue, which was among the few other airlines to show a profit, only made a relatively paltry $12 million.

Southwest lost $91 million in the first quarter of 2009, largely due to a $71 million drop in the value of its fuel hedges. The remainder of the loss is attributed to operational expenses that the airline hopes to reverse via a hiring and salary freeze, and voluntary buyouts. Southwest is also not planning to expand for the first time in company history, though it will add flights to New York’s LaGuardia airport in June.

US AirwaysThough Continental did not post a profit last quarter, it did report a smaller-than-expected loss of $136 million and beat analysts’ estimates. The airline was hurt by sales that fell 17 percent since last year, and a drop in passenger traffic of 11 percent. American’s loss was also smaller than predicted at $181 million, and US Airways Group lost $103 million.

The other big legacy airlines suffered much larger losses. United’s parent company, UAL, lost $382 million during the first quarter, amid a revenue drop of 21 percent and a 30 percent drop in first and business class travel. Delta lost $794 million even though revenues rose 40 percent due to its merger with Northwest.

Carriers with many overseas routes were stunted by overseas yields that dropped due to the overall decline in demand for foreign travel, which fell modestly for leisure passengers, but more dramatically in the business travel sector.

Despite the staggering losses, some analysts think the worst might be over. Though most airlines have consistently posted losses over the last four quarters, the amounts were smaller this quarter than in previous ones as fuel prices have stabilized and the recession seems to have bottomed out. International routes are expected to be weak for at least several more months, but demand on domestic routes will likely creep back up, particularly in the second half of the year.

Revenues could increase again as airlines continue to trim capacity, which will drive fares up. Additional revenues will be generated by the addition of more ancillary fees, which though not popular with customers, are a huge money-earner for airlines. Delta recently raised its fees for checking a second bag to $50 in hopes of raising at least $100 million in revenue this year, and Alaska, which lost $19 million in Q1, will begin charging customers $15 for their first checked bag.

Analysts expect Delta, Continental, Southwest and JetBlue to earn a profit for the full year of 2009, while American and United will likely stay in the red. However, if fuel prices become volatile again or passenger demand proves fickle, that could change.

By Karen Elowitt for PeterGreenberg.com.

Related links: Associated Press, Wall Street Journal, USA Today, Philadelphia Inquirer, USA Today, Bloomberg

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