(RPM) U.S. June Air Traffic Analysis

Despite the lingering uncertainty in U.S. recovery as well as debt concerns in Europe, the demand for air travel has rebounded to some extent after the March 2011 Japan catastrophe. For the past several months, air carriers have been struggling with rising fuel prices. In order to alleviate the pressure, the carriers are passing the increased cost to customers by hiking fares.

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

The consolidated June traffic dipped 0.9% at the largest U.S. airline United Continental Holdings Inc. (UAL). Both domestic and international traffic fell 0.9% and 1.2%, respectively, during the month.

The 0.6% increase in capacity (or available seat miles) was partially offset by a 130 basis point (bps) year-over-year decrease in the load factor (percentage of seats filled with passengers). United Continental expects a4% to 5% year-over-year increase in unit revenue for the month of June, measured by passenger revenue per available seat mile (PRASM), a key metric in airline performance.

United Continental expects lower-than-expected unit revenue growth of 8.3–9.3% in the second quarter of 2011 due to tough year-over-year comparisons. The Zacks Consensus Estimate for the second quarter is $1.48, representing a substantial 24.20% decline from the year-ago quarter.

The company expects acapacity growth of 1% year over year, which is toward the low end of its previous guidance of 0.8–1.8%. The company has increased its international flights by 4.3% but decreased its domestic flights by 1.4%.

Delta Air Lines Inc. (DAL), the second largest U.S. airline, reported a 1.5% year-over-year traffic decline in June due to a dip in domestic traffic. On a year-over-year basis, consolidated capacity inched up 0.2% while the load factor fell 140 bps. Domestic traffic dropped 2.7% year over year on acapacity decline of 1.5% and a 110-bp decrease in load factor. International traffic rose 0.3% year over year on a 2.5% capacity increase, partially offset by a 190-bp decline in load factor.

Delta Air Lines expects second quarter 2011 to be profitable owing to higher revenues, which would largely offset the surge in fuel prices. The Zacks Consensus Estimate for the second quarter is 50 cents, representing a decline of 22.52% year over year.

The company expects the second quarter’s PRASM to grow 10% year over year and fuel cost to be down from the prior expectation of $3.26 per gallon to $3.23 per gallon. Delta now expects the disaster in Japan to hurt total revenue by $125 million in the second quarter compared with the previous expectation of $150 million.

Following the merger of AirTran Holdings, the low-cost carrier Southwest Airlines Co. (LUV) recorded an increase of 7.5% year over year in June traffic, the highest compared to its rivals, on a capacity increase of 6.2%. The month’s RPM increased to 9.6 billion from 9 billion in June 2010. Load factor grew to 83.9% from the year-ago level of 82.8%. The company expects PRASM to increase 5% year over year for June 2011.

For the second quarter, traffic climbed 8.8% year over year on a6% capacity growth and aload factor increase of 210 bps. The Zacks Consensus Estimate for the second quarter is 23 cents, representing a decline of 22.07% year over year.

We believe Southwest is benefiting from increased ancillary product offerings such as EarlyBird check-in, unaccompanied minor travel and pet fees, WiFi connectivity, new reservation system, and new Rapid Rewards.

Further, the merger of AirTran that was completed on May 2, is generating healthy returns on expected synergies and benefits and could further improve its revenue and operating income with the introduction of its services to new and unexplored domestic markets and debut in the Caribbean and Mexico markets.

June traffic for American Airlines, a wholly owned subsidiary of AMR Corporation (AMR), rose 1.3% year over year on a capacity increase of 1.8%, partially offset by a load factor decline of 50 bps. Strong international traffic (up 4.8%) was partially offset by weak domestic traffic (down 0.9%).

American Airlines’ revenue could be hurt by $60 million due to a spring hailstorm at its Dallas-Fort Worth hub. Thus, the company expects its unit revenue to increase 4.5–5.5% in the second quarter.

We are currently maintaining our long-term Neutral rating supported by the Zacks #3 (Hold) Rank on Delta Air Lines and Southwest Airlines. United Continental retains a long-term Outperform rating with a Zacks #2 (Buy) Rank. AMR Corp. retains a short-term Hold rating with the Zacks #3 Rank.

AMR CORP (AMR): Free Stock Analysis Report

DELTA AIR LINES (DAL): Free Stock Analysis Report

SOUTHWEST AIR (LUV): Free Stock Analysis Report

UNITED CONT HLD (UAL): Free Stock Analysis Report

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