‘Weathering the storm’ and fuel prices – this sums up the top U.S. carriers’ performance in the third quarter of 2018. Aside of expenses from Hurricane Florence, which slammed North and South Carolina in mid-September, rising fuel prices also cut into profits for all major airlines, as recently (on October 25, 2018) released financial results from American Airlines and Southwest, as well as earlier reports from United and Delta, indicate.

Strong demand leads to record revenue for American

American Airlines’ net income fell to $341 million, or $0.74 per share, in third quarter ended September 30, 2018. That is a drop by almost half compared to $661 million, or $1.36 per share, same period a year earlier. It is also lower than the company’s second-quarter 2018 reported net profit of $566 million, or $1.22 per share.

On an adjusted basis, American earned $523 million, or $1.13 per share. The Group attributes strong demand for air travel to the 5.4% year-over-year increase in its third-quarter 2018 operating revenue – a rise to $11.6 billion.

“Strong demand for American’s service led to record revenue in the third quarter and our eighth consecutive quarter of unit revenue growth,” commented Chairman and CEO Doug Parker.

The No. 1 U.S. carrier by passenger traffic explains the decline in earnings as a result of significantly higher fuel prices, which increased the company’s expenses by approximately $750 million versus third-quarter 2017.

American’s total third-quarter 2018 operating expenses were $10.9 billion, up 12.4% year-over-year, driven by a 42.6% increase in consolidated fuel expense.

Pre-tax profit excluding net special items for September quarter of 2018 were $688 million, which is a $485 million decrease from same period in 2017, driven by higher fuel prices. The company’s adjusted pre-tax margin was 6%.

Pre-tax earnings were also negatively impacted by Hurricane Florence by approximately $50 million. The extreme weather forced American to cancel about 2,100 flights in September, 2018.

Southwest: record revenue but rising costs

Released on the same day as American, Southwest’s results for third-quarter 2018 (ending September 30) displayed record earnings. The company’s net income grew to $615 million, or $1.08 per share, from $528 million, or $0.88 per share, same period a year ago.

The Dallas, Texas-based company’s adjusted net income for September quarter of this year was $614 million, or $1.08 per share, compared with third quarter 2017 adjusted net income of $554 million, or $0.93 per share.

In a surprise, Southwest’ third-quarter 2018 results show a $733 million net income, or $1.27 per share, the company reported in previous, second, quarter of 2018. Adjusted net income in that earlier quarter was $729 million, while earnings per share were $1.26.

"The significant increase in our third quarter 2018 earnings per diluted share was driven by record third quarter operating revenues, lower federal income taxes, and a 4.8 percent year-over-year reduction in share count,” reflected Gary C. Kelly, Chairman of the Board and CEO of Southwest.

“Despite higher jet fuel prices and other cost pressures, we grew our third quarter 2018 net margin, year-over-year, which is a notable accomplishment,” he added.

However, quarter three of 2018 also saw the company‘s operating income fall to $798 million, or $796 million adjusted, which is a nearly 6% reduction compared to $845 million same time last year. Total operating revenues rose 5.1% year-over-year, to $5.57 billion in third-quarter.

Out of Southwest’s total third-quarter 2018 operating expenses of $4.78 billion, up 7.2% year-over-year, a $1.21 billion was spent on fuel and oil, making it a 16.2% increase compared to same period in 2017.

Rising fuel costs reached $2.25 per gallon for Southwest and the airline said it expects fourth quarter economic fuel costs to further increase, reaching the $2.30 to $2.35 per gallon range.

What about United and Delta?

United and Delta had already announced their third-quarter 2018 financial results in mid-October.

In third quarter of 2018, United reported an adjusted net income of $836 million, or $3.06 per share, compared to $645 million, or $2.15 per share, in third-quarter last year. Operating revenue grew to $11 billion, which is a 11.2% rise year-over-year.

"Our stand-out third-quarter performance, which produced double-digit revenue growth as we more than offset the steep increase in fuel costs, is proof that United is building momentum," said CEO Oscar Munoz.

Third-quarter earnings per share increased 42% year-over-year with a 36% increase on an adjusted basis. The carrier points to the impact of tropical storms across its system as having reduced earnings per share by around $0.07.

United’s operating expenses dedicated to fuel skyrocketed to $2.57 billion, compared to $1.81 billion in 2017, a staggering increase of 42.2%. The company stated it had recaptured around 100% of its year-over-year fuel expense increase.

The airline also reported adjusted pre-tax earnings of $1.1 billion and an adjusted pre-tax margin of 9.7%.

Delta’s September quarter 2018 results display an adjusted operating revenue of $11.8 billion, an improvement of 8%, or $912 million versus the prior year. According to the company, this record quarterly revenue result was driven by improvements across its business – higher airfares and strong sales of premium cabin seats helped lift revenue.

Glen Hauenstein, Delta’s President commented: “We generated record revenues in the September quarter on strong demand across the business and a favorable yield environment. […] The benefits of our brand, industry-leading network, and relentless focus on the customer are driving revenue growth, improving margins and accelerating the pace of our recapture of higher fuel costs.”

The second-largest U.S. airline’s net income rose 13% in the three months ended September 30, 2018, from a year earlier to $1.31 billion. Adjusted pre-tax income was $1.6 billion, and adjusted earnings per share were $1.80, at the high end of guidance.

Adjusted earnings per share were up 16% compared to the prior year quarter, these were driven by revenue momentum, tax reform benefits and a 4% lower share count, the company stated.

However, the airline's fuel bill rose 35%, to $655 million, from a year earlier on an adjusted basis. Delta’s adjusted fuel price per gallon for the September quarter 2018 was $2.22, which includes $12 million of benefit from its refinery.

“Our solid eight percent revenue growth, combined with flat non-fuel unit cost performance, helped offset 85 percent of the $655 million fuel cost increase in the quarter,” explained Delta’s CEO Ed Bastian.

The airline’s third-quarter results also reflected a $30 million negative impact from none other than Hurricane Florence.

What do airlines expect in Q4?

To combat high fuel prices, American is cutting capacity growth, cancelling unprofitable routes and deferring deliveries of new aircraft.

“We have moved quickly to adapt to the higher cost environment with lower planned capacity growth, the cancellation of unprofitable flying, deferral of new aircraft deliveries, and continued aggressive cost management,” said the airline’s Chairman and CEO Doug Parker.

“[…] We are confident these actions will return American to both revenue outperformance and earnings growth in 2019 and beyond and we remain very bullish on the future of American Airlines.”

However, in its financial release, the American Airlines Group stuck to its full-year profit forecast of $4.50 to $5.00 per share. The company forecasts unit revenue to rise between 1.5% and 3.5% in the fourth quarter of 2018.

Southwest says that so far, its revenue momentum has continued into fourth quarter 2018 and the company expects unit revenue year-over-year to grow in 2019.

“We expect $80 million to $90 million of year-over-year improvement in fourth quarter 2018 pre-tax results […], which is in line with our annual 2018 pre-tax goal of $200 million,” Southwest’s CEO Kelly stated.

According to the company, its fuel hedge portfolio “mitigated a significant portion of market jet fuel price increases”, and says it is confident with the fuel hedge in place for both fourth quarter 2018 and annual 2019.

Looking forward, Kelly says the carrier will concentrate on “driving efficiency”: “We are refocusing our efforts to control costs and drive efficiency, and, as ever, we remain steadfast in our efforts to produce industry-leading margins and superior returns in excess of our cost of capital.”

Despite an expected 30% increase in fuel price, Delta says it expects pre-tax margins to stabilize in the fourth quarter driven by continued growth and improving cost performance.

“In the December quarter we expect total unit revenue growth of three to five percent, driving full year revenue growth to eight percent, the high end of our guidance,” said Glen Hauenstein, Delta’s President.

Meanwhile, United anticipates full-year 2018 adjusted earnings per share to be between $8.00 and $8.75. The company currently expects to recapture around 90% of the estimated $2.5 billion year-over year increase in full-year 2018 fuel expense.