2 Largest Airlines’ Profits Decline as Travelers Sought Cheaper Fares

UAL Corp. and AMR Corp., parent companies of the world’s two largest carriers, reported lower profits for the second quarter as travelers sought cheaper fares, but their performance exceeded analysts’ recently lowered estimates.

US Airways Group Inc. also saw its earnings fall, due to higher labor costs and cheaper fares.

Trans World Airlines Inc. reported a bigger-than-expected loss in the quarter as labor troubles and a threat of a strike scared travelers away.

The results add to evidence that the major airlines miscalculated when they imposed three industrywide ticket price hikes this year. Traffic declines in April and May led UAL’s United, the world’s largest carrier, to institute a summer fare sale that was quickly matched by AMR’s American, US Airways and other big rivals.

Analysts had lowered forecasts for U.S. airlines as signs of weak passenger and revenue trends emerged early in the quarter and after UAL and US Airways warned that fare sales, storms, computer problems and higher labor costs would dampen profits.

UAL said its operating profit fell 17% to $349 million, or $2.86 a share, beating analyst estimates of $2.66, as revenue rose 2.2% to $4.54 billion.

It said fare sales by discount carriers and glitches in switching to a new computer system used for pricing its fares hurt profit and revenue. It said it would consider a fare hike to adjust for rising costs.

AMR said profit from continuing operations dropped 34% to $268 million, or $1.70 a share, as travelers sought cheaper tickets and flights were disrupted by weather and air traffic control problems. The performance was 4 cents higher than analyst forecasts. Revenue edged up 1.8% to $5.01 billion.

US Airways’ operating profit dropped 30% to $136 million, or $1.83 a share, matching analysts’ revised expectations of $1.83, as its costs rose with new labor contracts and as it sold fewer tickets. Revenue was down less than 1%, to $2.29 billion from $2.3 billion.

TWA reported a loss from operations of $5.3 million, or 17 cents a share, contrasted with profit from operations of $24.8 million, or 28 cents, a year ago. Wall Street was expecting a loss of 12 cents. Revenue slipped 2% to $866 million.

These airlines are the last of the major carriers to report. Four of the 10 biggest U.S. carriers--Delta Air Lines Inc., Northwest Airlines Corp., Southwest Airlines Co. and Alaska Air Group Inc.--reported higher profits, helped by a rebound in June traffic.

Still, the airlines face a flood of challenges the rest of the year. Fuel costs are rising, unions are demanding higher wages and business fliers are switching to discount fares from full-priced tickets. Fares are likely to go up this fall when the summer discounting ends and airlines consider another increase, airline executives said.

Goldman Sachs analyst Glenn Engel said industry profits fell about 17.5% in the quarter from year-ago levels, slightly less than the decline expected by Wall Street.

“Momentum improved as the quarter progressed . . . and that bodes well for the third quarter,” he said. “In the third quarter, I’d expect [profits] to be down closer to 10%.”