AMR Corporation (AAMRQ), Delta Air Lines, Inc. (DAL): Will Airlines Prosper During the Busy Summer Season?

We are now a few weeks into the busy summer travel season, when major airlines make a significant proportion of their annual profit. Many airlines had a rough spring, due to a confluence of factors such as the calendar shift of Easter and Passover into March, a brief period of FAA furloughs that exacerbated airport delays, and tepid economic growth.

However, airline executives consistently stated that summer demand appeared strong. Based on the industry’s unit revenue results for June — the first month of the summer travel season — it looks like the expected demand has materialized. However, with oil prices on the rise again, the industry could be hit with higher than expected fuel bills, dampening margins.

Unit revenue on the rise again
After every one of the five largest U.S. airlines reported unit revenue declines in April and all but one reported declines again in May, a strong June was critical for the industry. Fortunately, most carriers delivered last month. Here are the full results:

Source: Airline press releases

Of the five top carriers, only Southwest Airlines Co. (NYSE:LUV) reported a unit revenue decline for June. This may be partially due to the company’s upgauging initiatives; it is adding a row of seats to most of its planes, while also swapping out a number of jets seating 137 or fewer passengers for new Boeing 737-800 planes that seat 175. These actions tend to depress unit revenue, but they also reduce unit costs. In fact, Southwest Airlines Co. (NYSE:LUV) was able to increase its system capacity 1.7% last month despite offering 4% fewer flights than in June 2012.

The industry’s return to unit revenue growth last month was particularly encouraging because all of the major carriers but United Airlines increased capacity. Capacity increases tend to lower unit costs, but if demand is insufficient, the excess capacity hurts unit revenue. Fortunately, AMR Corporation (OTCMKTS:AAMRQ), Delta Air Lines, Inc. (NYSE:DAL), and US Airways Group Inc (NYSE:LCC) seemed to have no trouble filling their extra seats in June, and United’s capacity cuts did help it post the strongest unit revenue growth in the industry by far.