An Airline Profit Party (Finally!)

By SHARE

It has taken six years, but the airline industry appears to be making money again. A little bit, anyway.

So far, three major airlines have reported third-quarter earnings, and all are in the black. Southwest, as usual, reported healthy numbers, although they were a touch lower than what analysts had expected. CEO Gary Kelly said the shortfall came from higher fuel prices and disruptions that followed the London plane-bomb scare in August, when a ban on gels and liquids in carry-on baggage discouraged many travelers from flying.

Southwest's stock fell nearly 3 percent following its earnings news, however. While the carrier's low costs and operating savvy remain advantages, investors are worried that higher traffic and fuller planes on other carriers could cut into Southwest's profits.

But that's good news for competitors like Continental and American, which are both resurgent after years of tough cost-cutting. Continental said it earned $237 million in the third quarter, with double-digit increases in both traffic and top-line revenue. A day earlier, American Airlines posted $15 million in third-quarter profits–a small number, to be sure, but still a big improvement from the $153 million loss in the same period a year ago. Shares of both companies rose modestly following the news, as investors showed rare optimism about the bedraggled airline industry.

"We can only conclude that [American's] stock is heading higher," Credit Suisse predicted.

More revealing numbers will come on October 26, when U.S. Airways releases its earnings, and then on Halloween, when United, the biggest U.S. carrier to file (and survive) bankruptcy, reports. Two other big carriers, Delta and Northwest, are operating under Chapter 11 and aren't expected to emerge until at least next year–if they don't merge or get bought by another carrier.

The airlines, along with major competitors like Boeing, have been among the last companies to recover from the shock of 9/11 and the ensuing recession. But the industry overall is expected to show a third-quarter profit–its second quarterly thumbs-up in a row–as it claws its way back to good health. Big losses earlier in the year will probably result in negative numbers for the industry as a whole in 2006. But 2007 could bring significant profits for the first time since 2000.

--Rick Newman