Running Up the Score: Already having a good decade, U.S. airlines keep getting better

Running Up the ScoreDoug Parker, now CEO of American, and as such head of the world’s largest airline, doesn’t for a moment believe that the cyclical nature of the airline business is a thing of the past. But, he argues, the days of U.S. airlines losing billions of dollars during each down-cycle are gone forever.

Are they?

Well the industry’s 2013 financial results—including those of the fourth quarter alone—once again substantiated Parker’s claim. It’s not that a downturn tested airlines last year; on the contrary, America’s economy continued its modest recovery from the deep recession of 2008-2009, with GDP growing about 2% in 2013. But what carriers have accomplished during this slow recovery, and the protective buffers they’ve built against future shocks, suggest Parker’s prediction might prove right when the next downturn comes, as it inevitably will.

During Q4, U.S. airlines collectively earned a 7% operating margin and nearly $1.7b in net profits excluding special items and excluding three airlines that haven’t yet reported: Spirit, Virgin America and Frontier. This 7% figure is a sharp rise from the sector’s 3% operating margin in Q4, 2012. It’s up too from the 4% earned in Q4 2011 and the 5% in Q4 2010.

For all of 2013, meanwhile, the industry (including the three airlines that haven’t yet reported, based on Airline Weekly projections) managed more than $7b in net profits ex items and an 8% operating margin. That’s two points higher than the 5% it mustered in both 2011 and 2012 and even a point better than its 7% figure in 2010, one of the industry’s best years ever. That year, WTI oil prices averaged $79 a barrel. Last year? They averaged $98, a full 24% higher.

How did U.S. airlines enjoy their best Q4 and full year of the decade, in what’s already been an extraordinary decade? Most importantly, by greatly enhancing their revenue generating power through self-help initiatives now familiar to Airline Weekly readers: the three C’s of consolidation, capacity cutting and charging extra for everything, supplemented by variable flight scheduling, seat densification and high-return product and service investments. Cost control has played an important part too, led by aggressive fleet renewal to save fuel and IT investments to reduce labor and airport costs. Add to this the virtuous cycle triggered by success itself: profits beget more profits as the cost of new capital falls for successful companies, leading to stronger balance sheets, lower interest costs and the ability to…

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