An 'Incredible Transformation'.

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Author: Bond, David1

America West drops 'ridiculously low prices,' reaps reward with second-quarter profit

Propelled by what company executives portrayed as their yield-management gamble for the airline industry's biggest travel months, America West Airlines turned in its first profitable quarter since summer 2000 â€" $79.7 million, compared with a $12.9-million loss a year earlier.

As described by Scott Kirby, executive vice president of sales and marketing, the gamble was simplicity itself. Early in May, America West sorted the 92 days in June, July and August into 43 peak-travel days and 49 off-peak days, and blacked out sale fares on the peak days. "We refused to sell our product at ridiculously low prices," said CEO Doug Parker.

Kirby said this strategy turned out to be "very successful" in June, the last month of the second quarter, and it looks even better for July and August. On peak days in June, the airline had flat load factors, much like a year earlier, but big increases in yield â€" cents per revenue seat mile. On off-peak days the reverse was true; yields were flat, but the load factor was up.

Statistics for the full quarter don't reveal this. America West's revenue per available seat mile (RASM) was 8.1 cents, up 4.1% over the year-earlier quarter. But RASM is the product of yield times load factor, and yield's role was small. The load factor rose 3.1 percentage points to 78.9%; yield crept up only 0.1%.

Breaking down the data by month shows momentum that makes America West executives optimistic about the rest of the summer, however. RASM increased 0.1% in April, 2.4% in May and 10.3% in June. Kirby said he thinks the year-over-year increases will be even greater in July and August, in each case setting a company record for the month. During a 70-day period beginning in mid-June, load factors probably will exceed 80% every day except July 4, he said.

America West's return to profitability is "a fairly incredible transformation," Parker told securities analysts July 22, but it is fragile. The net profit was $12.9 million excluding special items â€" an $81.3 million reimbursement of federal security fees, offset by $14.5 million in special charges to cover eliminating hub operations in Columbus, Ohio, laying off white-collar employees and removing three Boeing 737-200s from service. Over the years, the second quarter has been America West's most profitable. That means the carrier will have to do better in the third quarter if it is to stay in the black.

This could happen. Forecasting continued RASM gains in July and August, Kirby said he expects reduced peak-day yield effects in September but load factors might remain high, as on the off-peak summer days. There will be no security-fee refund, but the government's fee suspension throughout the quarter â€" under the law that established the "holiday," payments resume Oct. 1 â€" will add about $4 million per month to the bottom line. And turning Columbus into just another Phoenix and Las Vegas spoke city, which had no significant effect on second-quarter finances, should provide most if not all of the third-quarter's share of savings estimated at $25 million per year.

"It's going to be close," Parker said when an analyst asked about third-quarter profit prospects. America West still expects red ink in the fourth quarter and a small loss for the year.

The carrier's brittle balance sheet leaves Parker in a mood to control growth cautiously. America West is highly leveraged and faces covenants from its 2002 federal loan guarantee that require it to use net proceeds from additional debt, equity or major asset sales to pay down current debt. It has financing for the single Airbus A320 scheduled for delivery this fall but lacks arrangements for two more A320s due next year.

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By David Bond