ATLANTA (AP) – Airline consolidation may not be the panacea for the industry amid persistently high fuel prices, but observers say it would help by removing domestic capacity from the system.
As several major carriers talk about possible combinations, two airlines — Delta and Southwest — gave investors another dose of reality in saying Wednesday their future results will continue to be weighed down by the cost of fuel.
Delta Air Lines Inc. officials were mum on the status of talks with Northwest Airlines Corp. and UAL Corp.'s United Airlines about possible combinations, as the Atlanta-based carrier reported fourth-quarter results that were hampered by jet fuel costs.
Southwest Airlines Co. reported its profit almost doubled in the fourth quarter, but said fuel costs in the current quarter will rise substantially for the Dallas-based carrier.
"We remain worried by high oil and the U.S. economy," Standard & Poor's airline analyst Jim Corridore said in a research note.
Delta's president and chief financial officer, Ed Bastian, said his airline believes cuts in domestic capacity and other cost controls will help offset the impact on Delta from higher fuel prices.
Domestic capacity cuts would likely impact Delta's hubs in Salt Lake City and Cincinnati, said Glen Hauenstein, Delta's chief of network and revenue management.
Southwest has tried to fly fuller planes, though its capacity increases outpaced traffic growth during the fourth quarter. That led to emptier, less profitable flights.
Southwest has also begun a multimillion dollar initiative to renovate its gate areas and marketing and said Wednesday it will begin installing equipment to test on-board Internet service. The airline has been gradually changing its boarding method from its long time "cattle call" to assigned spots in line at the gate, and it has launched a special business flyer program with higher ticket prices for in-flight extras.
Unlike most of its rivals, Southwest has been able to weather the high fuel prices because of its aggressive fuel hedging program in recent years. But as those older contracts run out, the carrier will become more susceptible to current market prices for jet fuel.
For the current quarter, Southwest estimated fuel costs of about $2 a gallon, up from $1.72 per gallon in the fourth quarter.
Delta reported Wednesday that for the three months ending Dec. 31, it lost $70 million, or 18 cents a share, compared to a loss of $1.98 billion for the same period a year earlier. The airline did not provide a per share figure for the prior year, when it was in bankruptcy.
Excluding reorganization items, Delta said it lost $105 million in the latest quarter.
Analysts surveyed by Thomson Financial were expecting a Delta loss of 18 cents a share.
Revenue in the fourth quarter rose 10 percent to $4.68 billion, compared to $4.25 billion recorded a year earlier.
Delta spent $1.36 billion on aircraft fuel and related taxes in the quarter, compared to $1.06 billion a year earlier.
Delta did not update investors on the status of talks between Delta and Northwest and United. Delta has said previously that its board is considering strategic options, including a possible consolidation transaction.
Delta Chief Executive Richard Anderson told analysts during a conference call that the company's strategic review continues. He declined to provide specifics.
Delta executives were asked during the call how the airline would be affected if Houston-based Continental Airlines Inc. were to merge with another airline and possibly leave the SkyTeam marketing alliance of which Delta is a part.
"We want to keep all of our partners in SkyTeam, including Continental," Anderson said.
Robert Isom, US Airways' new chief operating officer, disputes the notion that consolidation kills customer service. An industry composed of fewer, but better financed, airlines can be good for travelers, he said in an interview Tuesday with The Associated Press.
"If everyone is pinching pennies to the nth degree, that's in nobody's best interest, because what does that lead to? People don't invest in that business. Right?" Isom said.
He added, "The industry still struggles financially, especially when you've still got $100 a barrel oil. And trying to figure out a business model that works and is sustainable in the long run is something that we all have to be attentive to. Now, when you talk about the impact on the customer, getting that financial stability, OK, is important for customers, it's important for investors, and it's certainly important for employees."
Meanwhile, Delta said it expects to see its domestic capacity drop 2 percent to 3 percent in the first quarter, while its international capacity is expected to increase 10 percent to 12 percent in the first quarter compared to a year earlier.
Southwest said that in the fourth quarter its net income rose to $111 million, or 15 cents per share, compared to a year-earlier profit of $57 million, or 7 cents per share. Revenue rose to $2.49 billion from $2.28 billion a year earlier. Excluding special items, the company reported a profit of 12 cents per share.
Analysts expected profit of 10 cents per share.
Delta shares rose $1.13, or 7.6 percent, to $15.98 Wednesday. Southwest shares rose 78 cents, or 6.5 percent, to $12.76.
AP Business Writers David Koenig in Dallas and Chris Kahn in Phoenix contributed to this report.