Toyota raises annual profit forecast, eyes recovery

By Chang-Ran Kim
TOKYO | Tue Feb 7, 2012 6:54am EST
(Reuters) – Toyota Motor Corp raised its full-year profit forecast by more than a third as it cuts costs, trims spending and expects Japanese government schemes to boost sales, though the guidance was still some way below analysts’ expectations.

Japan’s No.1 automaker now expects operating profit – earnings from its core operations – for the year to end-March of 270 billion yen ($3.5 billion), a drop of 42 percent from last year, and lagging a consensus forecast of 331 billion yen from 23 analysts surveyed by Thomson Reuters I/B/E/S.

Toshiyuki Kanayama, senior market analyst at Monex Securities, said the revised profit guidance was a bit of a disappointment. “But the market is looking at the next financial year. The key for Toyota shares will be whether profit (next year) will rise to around 800 billion yen.”

Toyota, which has a market value of $135 billion — more than rivals Honda Motor Co Ltd, Nissan Motor Co Ltd and Suzuki Motor Corp combined — raised its annual forecast for net profit, which includes earnings made in China, by 11 percent to 200 billion yen.

October-December operating profit jumped 51 percent to 149.7 billion yen ($1.95 billion) from a year earlier, well ahead of the average estimate of a small decline to 93.9 billion yen.

Those results defied the impact of a stronger yen and the disruption to production and supply chains from widespread flooding in Thailand late last year that battered Toyota just as it was recovering from the March earthquake in Japan.

Toyota reckons the Thai floods will cost it 240,000 vehicles in lost production worldwide, allowing General Motors Co and Volkswagen AG to overtake it in 2011 vehicle sales.

Quarterly net profit slid 13.5 percent to 80.9 billion yen.

With the two natural disasters mostly behind it, Toyota expects its sales to jump by more than a fifth this year to a record 9.58 million vehicles, including subsidiaries Daihatsu Motor Co and Hino Motors Ltd. All its car factories, bar Thailand, are back at full speed.

“It’s premature to talk about any (sales) trends by looking only at our performance from last year when we had all those natural disasters,” Toyota President Akio Toyoda told reporters last week. “I would want Toyota to be measured on how we do this year, provided it’s a peaceful one.”

Senior Managing Officer Takahiko Ijichi said Toyota aimed to increase sales in China, the world’s biggest market, by around 14 percent to more than 1 million vehicles this year. He expects competition, particularly in North America, to be tough.

“The Big Three have improved their financial standing quite a bit, partly thanks to support from the government. Their cars are also getting better, and in that sense the competitive landscape has gotten a lot tougher,” Ijichi said, referring to Ford Motor Co, General Motors and Chrysler Group LLC.

“Korean brands are also pushing hard, so, for Toyota and Japanese brands, it’s a very tough race.”

Still, Ijichi said Toyota’s 19 new or refreshed models due in the United States this year should help it recover lost ground after a difficult 2011.

YEN WEIGHS

With the dollar trading at 76-77 yen, Toyota’s Achilles’ heel remains its heavy exposure to Japan.

Toyota last year built 2.76 million cars at home, accounting for one-third of Japan’s total vehicle production. It exported 57 percent of that, much of it at a loss. A plan to return its Japan-based parent operations to break-even assumes a dollar rate of 85 yen.

“Compared with Honda and Nissan, the pace of Toyota’s profit recovery is very slow,” said Koji Endo, analyst at Advanced Research Japan. “The issue of high fundamental costs appears not to have improved at all.”

Last week, Honda reported weak profits hit hard by the twin natural disasters, but flagged a big leap next year. Nissan, Japan’s No.2 automaker, reports on Wednesday.

Toyota is scrambling to make its domestic factories more efficient to keep its promise of building at least 3 million vehicles a year at home.

Ijichi said the company was also looking to import more components for Japan-made cars, setting up a special task force to speed up those efforts. Toyota now sources “a few percent” of its parts from abroad, he said.

For now, Toyota is counting on Japan’s re-instatement of cash-for-clunkers subsidies and the extension of tax incentives to ease some of the pain at home. The incentives particularly benefit hybrids and other cars that use new technologies. Its newest Aqua hybrid received orders equivalent to 10 times the sales target in its first month.

Toyota shares have risen 28 percent since the market’s trough in late-November, and Monday touched a 6-month high. Tokyo’s main Topix index is up 10 percent over the same period, while Nissan has gained 16 percent and Honda 29 percent.

Ahead of the results Tuesday, Toyota shares closed flat at 2,986 yen, and the Topix gained 0.4 percent.

($1 = 76.5850 Japanese yen)

(Additional reporting by Hideyuki Sano, Yoko Kubota and James Topham; Editing by Matt Driskill and Ian Geoghegan)

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Euro debt crisis weighs on insurers’ 2011

By Myles Neligan
LONDON | Mon Feb 6, 2012 1:29pm EST
(Reuters) – Near-record catastrophe claims, the euro zone debt crisis and low interest rates are likely to result in mostly weaker 2011 profits for European insurers.

Insurers, major investors in government bonds, took hefty writedowns on their portfolios during 2011 to reflect sharp falls in the price of some eurozone sovereign debt amid mounting worries over the issuing countries’ ability to repay.

The year was also marked by the industry’s second-biggest natural catastrophe loss, with European insurers and reinsurers absorbing a big chunk of the estimated $100 billion in claims stemming from Japan’s Tohoku earthquake and other disasters.

The double-hit from writedowns and catastrophes came as the sector endured its third consecutive year of rock-bottom interest rates, which erode investment returns and can inflict losses on life insurers that guaranteed customer payouts when yields were higher.

“The full-year figures are going to reflect a more challenging environment,” said RBC Capital Markets analyst Jean-Francois Tremblay.

“You are going to have the effect of very meaningful catastrophe losses, and you’re going to have more pressure as a result of continued reinvestment into lower-yielding assets.”

Investors will be looking for evidence that European insurers can avoid cutting their payouts to shareholders amid worries the euro area crisis might have sapped their capital reserves.

“There’s still a lot of uncertainty around companies’ capital positions because of the high level of volatility in equity markets and bond spreads,” RBC’s Tremblay said.

Italy’s insurers including Generali could cut dividends to make up for losses on their big holdings of Italian sovereign debt, which has suffered bigger price falls than any eurozone government bond except Greece’s, analysts at stockbroker Cheuvreux wrote in a note in December.

Insurers must write down their Greek bonds because an international bailout package being negotiated for Greece counts as a default event under accounting rules, but they are as yet under no obligation to impair their Italian debt.

The sector’s challenging 2011 was reflected in its shares, with the Stoxx 600 European insurance index losing 14 percent of its value over the course of the year, underperforming a 10 percent fall for the wider market.

The index has climbed 13 percent since the start of 2012 as fears of a major European sovereign default have eased, but the sector remains vulnerable to any perceived deterioration in eurozone members’ creditworthiness.

Investors will also be hoping for confirmation that a slow rise in motor and home insurance prices across most major European markets is gathering pace.

Prices began to edge higher across much of Europe last year after an extended period of stagnation prompted some insurers to write less business, easing competitive pressures, analysts say.

The increase partly reflects price hikes by companies worried they may fall short of higher reserving requirements under the European Union’s new Solvency II capital rules for insurers, due to come into force in 2014.

“The underlying message is a positive one – German motor is improving, and most countries are ticking up,” said Berenberg Bank analyst Peter Eliot.

(Reporting by Myles Neligan. Editing by Jane Merriman)

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Factory orders up, business spending rises

WASHINGTON | Fri Feb 3, 2012 2:56pm EST
(Reuters) – New orders for U.S. factory-made products posted a second straight monthly rise in December and business capital spending also picked up, a government report on Friday showed.

The Commerce Department said orders for manufactured goods increased 1.1 percent, slightly below Wall Street economist’s forecast for a 1.5 percent gain.

But November’s gain was revised up to 2.2 percent from a previously reported 1.8 percent and there were signs in the report of a firmer pace of overall factory activity.

During the full year 2011, factory orders gained 12.1 percent after a 12.9 percent rise in 2010.

Orders for non-defense capital goods excluding aircraft – a closely watched category because it is taken as a sign of businesses’ future spending plans – climbed a solid 3.1 percent in December. That followed declines of 1.5 percent in November and 0.9 percent in October.

Shipments for this category also increased by 3.1 percent in December after matching decreases of 0.9 percent in each of the two prior months.

Business spending had been a driver of the recovery since the 2007-2009 financial crisis, which pushed the U.S. economy into a deep recession.

During December, there were widespread gains in key order categories from computers to fabricated metal products and transportation equipment. Orders for electrical equipment were down from November, one of the few categories that declined.

(Reporting By Glenn Somerville; Editing by Neil Stempleman)

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Glencore and Xstrata in $80 billion takeover talks

By Clara Ferreira-Marques and Victoria Howley
LONDON | Thu Feb 2, 2012 1:24pm EST
(Reuters) – Commodities trader Glencore is in talks to buy mining group Xstrata in an all-share transaction that could create a combined group worth more than 50 billion pounds ($79 billion), shaking up the industry with its biggest deal to date.

Glencore, the world’s largest diversified commodities trader, already owns 34 percent of Xstrata and a tie-up between the two — a deal which would trump Rio Tinto’s $38 billion acquisition of Alcan in 2007 — has long been expected, as Glencore aims to add more mines to its trading clout.

“We’ve always had the belief these two companies should be together,” Glencore Chief Executive Ivan Glasenberg told a financial conference in Moscow.

Investors and analysts say the main potential stumbling block, after years of on-off talks, will be the price — the premium, if any, offered to Xstrata shareholders, who are already signaling they want to see the growth profile of their company recognized in any offer, however friendly, and will require a sweetener to approve the move.

But any agreement will also hinge on the relationship between the ambitious South African bosses of both companies — Glencore’s Glasenberg and Mick Davis at Xstrata.

News that Xstrata, the world’s fourth-largest diversified miner, had received an approach boosted shares in both companies, sending Xstrata up more than 14 percent and Glencore up over 8 percent.

Both sides said there was no certainty an offer would be made and the deal was described as an all-share “merger of equals.” Under UK rules, Glencore has 28 days to make an offer, though that could be extended at Xstrata’s request.

The two sides have little overlap in mining, meaning a combined “Glen-strata” would get synergies from some areas of marketing but would otherwise combine industrial and operational assets to create the world’s largest zinc and thermal coal producer and a heavyweight in copper and nickel.

Analysts at Credit Suisse estimate the synergies at around $468 million, roughly 5 percent of combined 2012 net income, thanks to a better use of Glencore’s marketing capabilities.

TOUGH TALKING

Any deal is expected to be agreed, or friendly, meaning Glasenberg and Davis, along with Xstrata shareholders, have to settle on one thing that has so far kept the two apart — valuation, and what premium Glencore will need to pay.

Davis and his Chairman John Bond, whose appointment last year was widely read as a signal to Glencore given the former HSBC boss’s tough reputation, are expected to be resistant to any deal that does not recognize what they see as Xstrata’s growth potential.

Glencore, though a shareholder, would not be able to vote on a deal, leaving the decision outside its hands.

“I don’t see any scenario where a nil-premium merger will get shareholder approval,” said one top-five shareholder, who declined to be named because of the sensitivity of the matter.

“We still haven’t seen Glencore’s Q4 figures either and there’s a bit of concern about the marketing profitability on that number. I’m assuming there’s nothing untoward … but even with that, I would expect to see some degree of premium.”

Another shareholder, a top-20 investor who also declined to be quoted, said: “We turned down Glencore at IPO on valuation grounds … there is no way we will take lower-quality paper without a sizeable premium to reflect the difference in earnings quality.”

Xstrata itself made a “merger of equals” bid for rival Anglo American in 2009, but that failed after Davis refused to offer a premium.

Glencore is not expected to offer a control premium for Xstrata, but it could offer an “equalization” premium, meaning an adjustment to the share ratio to better reflect the value of the two companies and their growth options, along with different valuations placed on marketing and mining businesses.

Xstrata has seen spectacular growth through deals, though it is now focused on organic or self-generated growth to boost production by 50 percent to 2014, with a project pipeline budget of $19.5 billion over the two years.

Analysts at Credit Suisse suggested a premium of 11 percent for Xstrata would put the two sides on similar valuations, and sources familiar with the situation suggested a “low double- digit” number would be feasible. Under a nil-premium merger, Glencore would own almost 60 percent of the combined group.

WHO’S THE BOSS?

Another question is who would run the combined entity, with Glasenberg and Davis, both driven dealmakers, in the running for the chief executive’s role. Both are expected to remain in some capacity, and though Davis is already the industry’s longest-serving boss, several sources familiar with the companies said he was expected to take the chief executive position.

Glasenberg, however, would also have a top executive role.

“He is the architect of the trading business, he has the power and will continue to wield it — his exact title doesn’t matter,” one of the sources said. Another said Glasenberg, as the top single shareholder in the combined entity, would remain a linchpin, regardless of his title.

While their two groups have held on-off talks over years, speculation over a tie-up accelerated with Glencore’s bumper $10 billion listing last May, which handed Glasenberg the currency for deals. The listing also allowed the market to put a value on Glencore — a key demand among Xstrata shareholders.

Glencore, a trader of metals, minerals and oil and which also has assets from mines to farmland, said at the time the motivation behind going public after almost four decades as a private company was to seize acquisition opportunities.

“These two companies were expected to merge and this is obviously a little bit faster than we had anticipated, but it makes sense given how the companies have performed and the current market positions,” said analyst Tim Dudley at brokerage Collins Stewart.

Glencore shares have fallen almost 17 percent since its listing, but have still outperformed the drop in Xstrata, listed in 2002 after the acquisition of Glencore’s coal assets.

If Glencore were to buy all outstanding Xstrata shares at current market prices that would cost around 21 billion pounds.

Xstrata is taking advice from Nomura and Goldman Sachs alongside JP Morgan and Deutsche, the company’s corporate brokers, people familiar with the matter said. Glencore has opted for advisers Citigroup and Morgan Stanley, which were also lead banks for Glencore’s $10 billion listing last May.

($1 = 0.6306 British pounds)

(Additional reporting by Sinead Cruise, Kate Holton, Sarah Young and Sudip Kar-Gupta in London, with Al Kueppers in Moscow, Elzio Barreto in Hong Kong and Sakhti Prasad in Bangalore; Editing by Chris Wickham and David Holmes)

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JPMorgan wows Wall Street with Facebook IPO win

By Nadia Damouni
NEW YORK | Wed Feb 1, 2012 9:09pm EST
(Reuters) – JPMorgan Chase & Co surprised Wall Street by winning a leading role in Facebook’s much anticipated public offering, besting other banks that have competed for months for the coveted position.

Morgan Stanley, JPMorgan and Goldman Sachs Group Inc got the lead roles in the IPO, while Bank of America Merrill Lynch, Barclays Capital and Allen & Co also landed underwriting roles.

The banks were told that they had all made the cut during a commitment meeting on Tuesday, two sources familiar with the situation said. Generally, banks assuming these roles are told months in advance of a company filing for an initial public offering.

Facebook submitted its IPO documents to the U.S. Securities and Exchange Commission on Wednesday. The company expects to raise targeted $5 billion.

Two other sources familiar with the matter said on Wednesday that JPMorgan’s months of schmoozing with Facebook executives paid off in the end. JPMorgan is ranked No. 4 among banks that advised on U.S. technology IPOs in 2011.

JPMorgan’s Chief Executive Jamie Dimon, veteran rainmaker Jimmy Lee and other senior executives courted Facebook’s Chief Operating Officer Sheryl Sandberg and Chief Financial Officer David Ebersman over the last year to help pave the way for the offering. Ebersman is leading the IPO process, one of the sources said.

As recently as December, Dimon visited Facebook’s headquarters in Palo Alto, California, to establish its position within the team of bookrunners, the sources said.

Lee has had a business relationship with Sandberg for years, which has allowed him to learn about Facebook’s culture among senior executives, one of the sources said.

Both Dimon and Lee saw Facebook as one of the next “Blue Chips,” and JPMorgan stepped in early to build a commercial relationship, including spending millions of dollars to help Facebook build a data center, the source said.

The hard-won mandate is likely to bode well for JPMorgan’s league table rankings.

Currently, JPMorgan is ranked after Morgan Stanley, Deutsche Bank and Goldman Sachs in the league tables for U.S. listed technology IPOs, according to Thomson Reuters data.

This counts because the banks may be doing the deal more for prestige than money. Facebook’s IPO could set a new standard for how much investment banks are willing to lower their advisory fees to win big business [ID:nL2E8CQEDA].

Banks may offer their underwriting services for as little as 1 percent of gross proceeds, sources have said, compared with the 7 percent fee that smaller deals typically fetch, or the 2 or 3 percent that large deals tend to command.

The underwriters established their relationship with the social network company over the last year through investments and loans.

In December 2010 and January 2011, Goldman Sachs purchased 69.5 million shares of Facebook’s Class A common stock for $1.45 billion, according to filing. In 2010 and 2011, Morgan Stanley purchased shares of Facebook’s Class B common stock.

A year ago, Facebook entered into a credit agreement with five lenders, including Morgan Stanley, JPMorgan, Goldman Sachs, Bank of America Merrill Lynch, and Barclays to borrow up to $1.5 billion in revolving loans, according to the filing.

In September 2011, the credit agreement was amended to increase the borrowing capacity to $2.5 billion, the filing said.

(Reporting By Nadia Damouni; Additional reporting by Alistair Barr and Stephen Lacey; editing by Paritosh Bansal)

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Facebook to file $5 billion IPO Wednesday: IFR

By Anthony Hughes and Stephen Lacey
NEW YORK | Tue Jan 31, 2012 6:29pm EST
(Reuters) – Facebook is expected to submit paperwork to regulators on Wednesday morning for a $5 billion initial public offering and has selected Morgan Stanley and four other bookrunners to handle the mega-IPO, sources close to the deal told IFR.

The company founded by Mark Zuckerberg in a Harvard dorm room in 2004 picked Morgan Stanley to take the coveted “lead left” role in what is expected to be the largest IPO ever to emerge from Silicon Valley.

The $5 billion is a preliminary target and could be ramped up in coming months in response to investor demand, IFR added.

The other four bookrunners chosen were Goldman Sachs, Bank of America Merrill Lynch, Barclays Capital and JP Morgan, although the underwriting syndicate could be expanded later, IFR cited the sources as saying.

Facebook declined to comment on the report by IFR, a unit of Thomson Reuters. “Lead left” refers to where the top underwriter’s name will appear on the IPO prospectus.

The preliminary IPO filing sets the stage for a May market of the world’s largest social network, IFR reported, a coming-out party that will dwarf almost any before that, including Google Inc’s $2 billion IPO.

IPO VETERAN CLINCHES DEAL

Morgan Stanley’s experience in arranging major Internet IPOs – including those of Groupon and Zynga – helped it clinch a pivotal role after an unusually secretive selection process, IFR reported.

Final pricing would not be set for several months, during which the size of the IPO could be increased should investor demand warrant it, IFR added.

The prospective IPO – expected to be one of the largest U.S. market debuts in history – has whipped up a frenzy of investor and media speculation this month, buoying shares in social media peers from RenRen to LinkedIn and igniting fierce competition on Wall Street.

The IPO – a prized trophy for any investment bank – likely set a new standard for how low its arrangers are willing to go on advisory fees to win big business, analysts say.

Silicon Valley start-ups from Zynga and LinkedIn to Groupon and Pandora Media Inc have since last year begun testing investor appetite for a new wave of dotcoms, with mixed results.

Investors last year had warned of a second dotcom bubble inflating, after LinkedIn doubled on its debut; but the so-called over-enthusiasm has waned in recent months.

The last dotcom player to debut, Zynga, closed 5 percent below its IPO price during its first trading day in December.

(Writing by Edwin Chan)

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Euro zone banks may double emergency loans from ECB: report

Mon Jan 30, 2012 11:15pm EST
(Reuters) – Some of the euro zone’s biggest banks have told the Financial Times that they are preparing to tap the European Central Bank’s emergency funding scheme for up to twice as much as the ECB supplied in its December auction.

The banks told the FT that they may double or triple their request for funds in the ECB’s three-year money auction on Feb 29, a further sign of the liquidity squeeze faced by the banks, the paper said.

Three bank chief executives, all of whom asked to remain anonymous, told the paper that they were planning to increase their participation two-fold or three-fold. The FT did not name any banks.

In the first of two planned offerings of unlimited cheap money intended to keep credit flowing among banks hammered by the euro zone’s sovereign debt crisis, financial institutions took 489 billion euros on December 22 from the ECB.

The European Central Bank will allot 325 billion euros ($427 billion) in its second three-year refinancing tender due in late February so long as money markets remain stressed, a Reuters poll of traders showed.

(Reporting by Sakthi Prasad; Editing by Muralikumar Anantharaman)

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Nokia sells media advertising business

HELSINKI | Fri Jan 27, 2012 4:39am EST
(Reuters) – Finnish group Nokia (NOK1V.HE) has sold its media advertising business to a U.S. startup Matchbin as it focuses on core businesses, a company spokesman said on Friday without disclosing detail of the deal.

Matchbin renamed itself as Radiate Media after acquiring the Nokia business, which employed 180 staff at a time of the deal.

Nokia, the world’s largest cellphone maker by volume, entered the mobile advertising business through its 2007 acquisition of U.S. company Enpocket.

It has focused on phone business and location based services under new chief executive Stephen Elop, and has been cutting back on its extensive foray into services like games and music.

(Reporting By Tarmo Virki; Editing by Dan Lalor)

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Starbucks profit beats, Europe weakness hurts

Thu Jan 26, 2012 6:47pm EST
(Reuters) – Starbucks Corp reported a quarterly profit that topped Wall Street’s view, but its shares fell as investors in the world’s biggest coffee chain focused on softness in Europe rather than strength in the United States.

The company’s shares, up roughly 45 percent from a year ago and hovering near all-time highs, were off 2.2 percent at $47.26 in extended trading after closing at $48.34.

Starbucks and other top-performing restaurant chains like McDonald’s Corp have been on a tear and their stocks often sell off on anything but absolutely pristine results.

Sales from cafes open at least 13 months were up just 2 percent for the Europe, Middle East and Africa region, versus the 9 percent gain for the much larger America unit, chiefly from the United States.

Chief Financial Officer Troy Alstead said on a webcast that Starbucks has been underperforming internal targets in Europe — where debt worries and high unemployment weigh heavily on consumers — and that the company has taken steps to improve results there.

Operating margin for the EMEA unit was 6.5 percent in the first quarter, down from 9.7 percent a year earlier.

Starbucks said the margin contraction was primarily due to higher distribution costs related to moving to a consolidated distribution center in its UK market.

Britain’s recovery from the 2008/2009 recession – the deepest since the depression-hit 1930s – has been sluggish.

Edward Jones analyst Jack Russo said results from Europe were weaker than expected, but that they needed to be seen in context.

“A 2 percent comp is still pretty good considering what’s going on over there,” Russo said, referring to Europe’s sales at established restaurants.

Based on its better-than-expected fiscal first-quarter results, the company raised the low end of its full-year profit forecast to a range of $1.78 to $1.82 per share from $1.75 to$1.82.

“They’re being conservative. It’s so early in the year,” Lazard Capital Markets analyst Matthew DiFrisco said when asked about the company’s revised fiscal 2012 forecast.

When asked if the company has noticed any evidence of softening consumer demand due to the still volatile economic conditions around the world, CFO Alstead said: “We haven’t seen it.”

Global sales at established Starbucks cafes jumped 9 percent, helped by an increase in customer visits and spending per transaction. That beat the 7.7 percent gain analysts, on average, expected, according to Thomson Reuters data.

Net income was $382.1 million, or 50 cents per share, for the quarter ended January 1. That was up from $346.6 million, or 45 cents, in the year earlier period.

Analysts, on average, were looking for a profit of 49 cents per share in the latest quarter, according to Thomson Reuters

I/B/E/S.

Total revenue rose 16 percent to $3.4 billion.

The Seattle-based company has been raising prices on some drinks to help offset higher costs for commodities like coffee and milk.

Starbucks expects new products to build sales as the year progresses.

In November it started selling its coffee and Tazo tea for Green Mountain Coffee Roasters Inc’s popular Keurig machines, which control about 80 percent of the fast-growing North American single-serve brewing segment.

It then expanded its coffee lineup in January with “Blonde,” the company’s lightest roast to date. That new coffee is widely seen as an answer to McDonald’s and Dunkin’ Donuts, which each brew lighter roasts than Starbucks. Those chains also have gone after Starbucks’ core business by introducing drinks such as lattes and frappes.

Starbucks, Chipotle Mexican Grill and Panera Bread Co cater to relatively upscale consumers and have been outperforming the broader restaurant industry, whose overall sales are expected to lag population growth this decade.

(Reporting By Lisa Baertlein in Los Angeles; editing by Andre Grenon, Phil Berlowitz)

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Delta, US Air beat Street views on higher fares

By Deepa Seetharaman
Wed Jan 25, 2012 9:41am EST
(Reuters) – Delta Air Lines (DAL.N) and US Airways Group (LCC.N) reported much stronger-than-expected fourth-quarter results on Wednesday as both carriers raised fares, offsetting a surge in fuel prices.

Shares of the two airlines shot up in early trading. Both are exploring a merger with AMR Corp, the bankrupt parent of American Airlines.

Delta’s earnings of 45 cents per share before special items beat the analysts’ average estimate of 38 cents, according to Thomson Reuters I/B/E/S. The company’s shares rose more than 7 percent.

US Airways, whose shares jumped more than 12 percent, reported an adjusted profit of 13 cents per share, trouncing Wall Street expectations of 2 cents.

For two years now, airlines have been recovering from a decade-long downturn that led to several airline bankruptcies and mergers. A spike in fuel costs in 2008 hastened a series of capacity cuts across the industry as well as higher fares.

The sector has improved profit margins by trimming flight schedules, raising fares and adding baggage fees. Retiring less fuel-efficient planes and cutting nonfuel costs also helped.

During the fourth quarter, revenue rose 8.5 percent at US Airways and 8 percent at Delta. Both posted double-digit fare hikes for both their mainline and regional carriers.

Delta reported net income of $425 million or 50 cents per share, for the quarter, up from $19 million, or 2 cents per share, a year earlier.

“Delta produced a revenue premium to the industry and fully covered our fuel cost increase with higher revenues,” President Ed Bastian said in a statement.

Rising fuel prices in 2011 pushed US Airways’ net income lower in the fourth quarter, to 11 cents per share from 17 cents a year earlier.

The company spent $3.4 billion on aircraft fuel and related taxes in 2011, up 41.4 percent from 2010.

Had fuel prices last year remained on par with 2010, US Airways said, its fuel expenses for 2011 would have been about $1.2 billion lower.

Industry executives, including US Airways Chief Executive Officer Doug Parker, have advocated further consolidation in the sector to contend with overcapacity and high fixed costs and fuel prices.

Delta and US Airways are exploring a potential deal with American Airlines, which filed for bankruptcy in November, people familiar with the matter have said.

“Looking forward, we are encouraged by the continued strength in demand and believe US Airways is well-positioned for success in 2012 and beyond,” Parker said in a release.

Shares of Delta were up 7.4 percent at $10.07 in early trading, while US Airways jumped 12.3 percent to $7.20.

(Reporting by Deepa Seetharaman in Detroit; Editing by Lisa Von Ahn)

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