Airlines Resist Urge To Expand Focus On Increased Profits May Be Bad News For Boeing

There’s been an unspoken rule in the airline industry: when profits rise, airlines order new airplanes.

And usually, the airplanes are added to their fleets just as the economy nose-dives, when passenger traffic falls and airlines need them the least.

But that cycle may have been broken. And that’s just fine with analysts who attended Commercial Aviation Report’s annual airline outlook conference in San Francisco. The analysts want airlines to hold down their growth and push up their profits.

“So far, management has shown a very good restraint,” said airline analyst Ray Neidl of Furman Selz Inc.

During the late 1980s and early 1990s, airlines grew rapidly as new airplanes streamed in.

American, United, Delta, Northwest and Continental, the five largest carriers, increased their capacity 44 percent between 1989 and 1992.

Most major airlines have pulled back after heavy losses in the early 1990s - $13 billion for all U.S. airlines between 1990 and 1994. After the large capacity increase in earlier years, the five largest carriers increased their capacity only 3 percent between 1992 and 1995.

Airlines earned $6 billion or more from operations in 1995, with less capacity and higher fares.

American Airlines Inc., for example, last placed an order for new planes five years ago and takes delivery of its final four new planes this year. The size of its fleet shrank by 36 airplanes in three years.

And while United Airlines Inc. has ordered 54 airplanes for delivery through 1999, most will replace aging aircraft.

Airline analyst John Pincavage of Dillon Read & Co. estimated that U.S. airline capacity will increase only 2 percent to 3 percent a year between now and 2000, as airlines crowd more seats onto existing airplanes and fly each airplane more every day.

For example, American’s fleet shrank 1.9 percent from 647 to 635 jets during 1995, but its capacity (airplane seats multiplied by miles flown) rose 1.7 percent as the fleet became more productive.

Northwest Airlines Inc. provides another good example of how airlines are expanding capacity by using their existing fleets better. Northwest estimates its capacity will increase 7 percent in 1996, but half that will come by adding more seats to existing aircraft or flying those airplanes more every day.

Northwest also provides a prime example of why airplane manufacturers Boeing Co., McDonnell Douglas Corp. and Airbus Industrie have not been swamped with new aircraft orders.

Faced with a need for short-haul, small airplanes, Northwest opted to refurbish its aging DC-9 fleet with new interiors and “hush kits” to quiet their engines to meet federal limits.

A notable exception to the industry’s slow-growth strategy has been Southwest Airlines Co., which continues to grow steadily. Alaska Airlines Inc. also has recently resumed its growth.

And a growing number of start-up airlines are providing a lot of the new capacity being added to the U.S. airline system.

“In effect, the big carriers have been posting big profits by getting smaller,” said Sam Buttrick, airline analyst for PaineWebber Inc. “Smaller carriers have been posting bigger profits by getting bigger.”

Because they aren’t paying for new airplanes, airlines often are using profits to pay down debt.

AMR Corp., American’s parent, retired $378 million in debt ahead of time last year, and it financed another $616 million in debt and leases. UAL Corp., parent of United, repurchased $750 million in debt and $96 million in preferred stock. Delta has repurchased $650 million in debt during the last 18 months.

Renee Shaker, vice president of Moody’s Investment Service, said airlines likely will see their credit ratings improve in coming years.

“Following some pretty bleak years for airline credit ratings, our view is that 1995 is marking the year of turnaround for airline credit quality,” Shaker said.

“We believe the industry has the potential of returning to investment-grade rating or something near to investment-grade by the end of the decade if current trends continue,” she said.

“With the improvement in airline credit quality, aircraft financing is going to be much easier for the industry as we plan for the second half of this decade,” she said.

Buttrick predicted that capacity will be growing at a 3.5 percent annual rate by the end of 1996, up from a 1.5 percent increase in 1995. That’s not too rapid a growth rate, but it is more than in 1995.

“I think the good news for 1996 is that profits will be very strong,” Buttrick said.