Allegiant Air Fourth-Quarter Profit Leads Major U.S. Airlines
Allegiant Air, please approach the stage to accept your trophy. No other U.S. airline had a better fourth quarter.
Indeed, among the 11 major U.S. airlines offering scheduled air service, Allegiant’s 16 percent operating margin (excluding special items) for the October-to-December quarter ranked highest, well ahead of Delta’s 12 percent. Nine of the 11 carriers in fact earned profits for the period. The two exceptions were Hawaiian and Southwest, for very clear, specific, and likely transitory reasons. Southwest suffered a now-notorious operational fiasco. And Hawaiian’s got a Japan problem, and to a lesser extent an inter-island one. Two airlines — American and United — even improved their margins from 2019. (See the By the Numbers section for a full ranking of the 11 airlines).
Most didn’t improve, and it’s no wonder why. One key theme that emerged from Q4 earnings calls is that airlines have much higher costs today than they did in the days before Covid. Let’s use Allegiant as an example. In the final quarter of 2019, it paid an average of $2.18 cents per gallon for fuel. Last quarter it paid $3.59 per gallon, a 65 percent increase. Labor costs are rising sharply as well amid a shortage of pilots and other aviation professionals. Pilots at Alaska Airlines, for example, ratified a new contract in October, granting wage increases of up to 23 percent. That — plus new labor deals with four other work groups — drove a 22 percent increase in the airline’s labor costs in the fourth quarter compared to 2019.
All U.S. airlines are undergoing a wage reset as they negotiate and sign expensive new contracts (only somewhat mitigated by having so many new employees, who are paid at the junior end of the pay scale). All airlines are likewise grappling with higher fuel costs. All are seeing inflation in other areas as well, from airport costs to aircraft maintenance. One way to ease these pressures, according to the unique characteristics of airline economics, is to spread these additional costs over more seats and more miles flown. Better to have that higher-paid pilot, for example, flying more revenue-producing passengers each day. Alas, this age-old tactic of depressing unit costs by growing available seat miles (ASMs) is running into major obstacles. Alaska, for its part, flew 10 percent fewer ASMs in the fourth quarter than it did in 2019. It’s not that the demand wasn’t there to grow. Alaska — and other U.S. airlines — couldn’t grow because of constraints like air traffic control congestion, aircraft delivery delays, long waits to perform engine maintenance (talk to Spirit about this), pilot shortages (especially at the regional level), airport worker shortages, training backlogs, increasingly disruptive weather, and so on.
United, in its fourth-quarter earnings call, said it’s now running with about 25 percent more spare aircraft than it did pre-pandemic. Aircraft utilization too (in other words, how many hours per day planes are flying), is down significantly. “Instead of pushing utilization to its theoretical limit, we are focused on protecting our reliable operation,” United Chief Financial Officer Gerry Laderman said. Earlier in 2022, as demand suddenly and sharply revived, most U.S. airlines tried to operate flight schedules that they ultimately couldn’t execute, leading to mass delays and cancellations last spring. The situation has improved industry-wide, Southwest’s winter woes notwithstanding, as carriers scaled back their flying. But you can see how this scaleback negates their hopes of using growth to alleviate the new cost burdens.
Sounds like an ominous turn of events, but another key theme of fourth quarter earnings season — a happy one for airlines — was at least as influential. Demand was downright spectacular, leading to record revenues. Some of that was merely less capacity leading to higher fares. But more generally, Americans — after being denied their vacations during Covid — want to fly. Allegiant, a domestic-only airline, called demand “extraordinarily robust.” United, talking about international demand, used the phrase “incredibly strong.” Corporate demand is still a good 20 percent short of full recovery, in volume terms. But forget about volume terms. In revenue terms, corporate travel has never been better.
In sum, revenue growth has been enough for most U.S. airlines to emerge from fourth quarter with a profit. In fact, of the 11 major airlines, all but four (JetBlue, Spirit, Frontier, and Hawaiian) managed profits for all of 2022.
The giant question now is can the current demand and revenue strength hold, and for how long? During most of 2022, and so far in 2023, travel has been perhaps the healthiest sector in the U.S. economy. That’s after being the most troubled sector in 2020 and 2021. Americans are currently spending their disposable income on beach vacations and dinner reservations, not home decorations and garage door installations. For that matter, they’re now paying less at gas stations. Maybe that’s a new norm. Maybe not. Maybe a recession looms. Maybe the economy holds solid, supported by a strong job market. Airlines, for sure, are hiring.
Amid this uncertainty, the industry will fight its cost war on several fronts, working to eventually restore normalized levels of aircraft utilization, while also adding new planes offering greater cost efficiency, like Boeing 737 Maxes and 787s, and Airbus A320neos and A220s. They’ll work on sustaining their revenue momentum as well, with new ancillary, merchandising, and distribution strategies. Lots of new alliances and partnerships are in development (a United-Air Canada joint venture, for one). Route networks, meanwhile, have changed a lot since 2019. American, for example, greatly downsized its footprint in Chicago, Los Angeles, and Philadelphia while adding capacity in fast-growing cities like Austin, Nashville, and — most importantly — its prized hub in the booming Dallas-Fort Worth metroplex. United and Delta, with more widebodies to work with, have aggressively expanded across the Atlantic to Europe, India, Africa, and the Middle East. Southwest and JetBlue have reduced their presence in Florida. Alaska has prioritized Seattle while shrinking in California. Southwest opened 18 new stations. And so on.
The current January-to-March quarter, remember, tends to be the weakest quarter of the year for U.S. airlines. But it’s typically the best quarter of the year for Florida and Caribbean routes. We’ll see who has the best margins for first quarter sometime in May. For now, enjoy your trophy, Allegiant!