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June 21, 2024
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Among the US airlines, things are looking great.  For the 3Q 2014, the numbers are stellar.  In addition to the numbers listed, the industry had a profit margin over 7%.  For the US airline industry profit margins are their highest in 15 years.

  • 104,444m passengers
  • $119,258M Operating revenues
  • $107,841m Operating expenses
  • $8,690m Adjusted profit

From 1995 to year end 2013, enplanements are up over 21%, seat capacity is down over 11%  and load factor is up over 25%.   Making things even better, ancillary revenues have helped send an additional $4B straight to the bottom line.  While fares in constant dollars are down over 14% since 1995, passenger revenue is up over 73%.

If you squeeze more people into fewer aircraft and get to lift more money from their wallets, even though fares are lower in real terms revenues should be positive.  Combining that with lower costs that have been restructured in virtually every area over the last decade, and it is a recipe for profitability.  The following chart illustrates how that profitability has been built.

The impressive jump in profitability comes from 2009 onward – after Delta and Northwest merged, leading off the latest round of industry consolidation, which in turn has improved industry discipline with respect to capacity.  In other words, the industry then started to operate like a rational oligopoly.  Fares were stable, capacity growth was controlled, and everybody returned to profitability.  The 3Q14 numbers are the best seen in a very long time, even when measured in margin percentages rather than sheer record  profits.

2014-11-11_13-27-05So is this airline Nirvana?

Well not yet.  Can the oligopoly hold?  We would say yes because of consolidation.  But wait, there’s more.

US airlines are rational operators. They seek the lowest input costs.  The next chart shows how fuel efficient the industry has become.  Traffic is up by more than 50% since 1995, yet the industry is using 7% less fuel.


Looking at what fuel prices are doing these days, and you have to wonder.    It’s not just US airlines benefiting from lower costs. Singapore Airlines’ fuel costs decreased by $82.6m yoy in the first-half of fiscal year 2014-15.  IATA estimates at the lower prices the industry will save $7bn this year in lower fuel bills.  Jet A costs over 6% less than 30 days ago and over 16% less than a year ago. Is this price decline going to last a while?


The chart above comes from Indexmundi.com and shows the five year price of Jet A has been softening for a while.  The US Energy Information Agency forecast shows the spot price is falling below the 12 week moving average.  This suggests markets are weakening and prices are headed lower.  For a blow by blow on Jet A prices, visit Platts.  Given the sharp rise in US fuel exports, we would think the softening in Jet A is here to stay for a while.  Oil demand is not growing as fast because of rising efficiencies, especially among airlines.

We think that traffic continues to grow slowly in the mature US market and airlines continue to burn less fuel – even at 85% load factor there’s some capacity left before fleets have to grow.  The drop off in fuel costs means that whereas at $3.25/g a single aisle sees 48% of its operating costs in fuel, at @2.35/g the operating cost drops to about 40%.

Therefore airlines can afford to slow down aircraft retirements.  This means slowing the new aircraft deliveries.  Deferring those more expensive aircraft is rational.  Of course this happens as Airbus and Boeing plan to expand production capacity.  We may be about to enter one of those “interesting” periods in the business again.  But as we’ve previously warned, all bubbles eventually burst.  Will lower fuel prices burst the narrow-body order bubble?  We’ll find out soon.

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