Airlines toughed it out through the end of one of the worst decades on record, cutting capacity, fares and free perks in the face of reduced demand. Head winds had been easing up a bit as the economy looked to be gaining altitude, giving airline execs and analysts pause to predict a better 2010.
“It’s difficult to take a bearish action on the space unless you’re a bear on an overall economic rebound,” said analyst Hunter Keay of Stifel Nicolaus.
Meanwhile, business travel, the most profitable segment for airlines, is starting to show signs of picking up, though tentatively at best.
Continental Airlines made it through the worst of the downturn in better shape than many, and with less obvious cuts to service. It’s still serving free meals, even in coach. And it kept modernizing its fleet, the youngest among its peers.
“It’s become a premium network carrier among a group of carriers that have unfortunately been dumbing down their service the last 10 years,” said former TWA executive Robert Mann, president of airline analysis firm R.W. Mann & Co.
And though Continental scuttled a merger with United after Delta and Northwest merged, it ended up joining with United in October in the Star Alliance, which gives it a stronger presence in more-profitable international markets. For example, it gained a strong connecting hub in Frankfurt with Lufthansa.
Meanwhile, Continental will be able to connect into United’s stronger West Coast system. And Continental gives United passengers connections near New York at Newark Liberty International Airport, where a growing number of flights are bound for London and beyond. The same goes for its Houston hub, with flights to Latin America.
Houston-based Continental sees the new alliance as more complementary than competitive compared with its prior SkyTeam alliance with Delta. Delta, for example, has been adding flights in New York and to Latin America from Atlanta.
The Star Alliance will add about $100 million in revenue in the first 12 months, company execs estimate.
“Judging by its fleet, management and route system, I would be very surprised if they don’t end up solidly in the black in 2010,” said Michael Boyd, president of aviation consultants Boyd Group International.
Continental’s new chief executive, Jeff Smisek, is betting his pay on it. Upon taking over from Larry Kellner at the first of the year, he said he wouldn’t accept a salary or bonus unless the airline made a profit in 2010.
Lower fuel costs helped the airline turn in a fourth-quarter profit of 3 cents per share vs. a loss of 84 cents in the year-earlier quarter. Continental’s light fuel-hedging policy gives it an edge when fuel costs are relatively low, as they are now. But it could prove risky if oil prices spike.
At some point fares will have to go up,” Boyd said. “They did go up (in January), but not nearly enough. Passengers are paying less today than they did a year ago.”
Continental’s 2009 systemwide load factor, the percentage of seats filled, hit a record-high of just under 82%. January’s 77.2% load factor was a record for the month, four percentage points higher than for the same time in 2009.