A Quarter of Questions: Why is United blighted, and other key questions arising from America’s Q1 earnings season

United Airlines QuarterNothing seems to stop the vastly restructured U.S. airline industry from piling on profits—not an off-peak period, not an Easter date shift, not a new set of pilot regulations, not rising labor costs and not even winter storms of biblical proportions.

During the first quarter of 2014, nine reporting U.S. airlines collectively earned nearly a half billion dollars in net profits and an operating margin of 4%, a record-breaking Q1 performance for the post-9/11 era. Remember too that the country’s third largest airline by revenues—the behemoth United—lost nearly a half billions dollars. So exclude that and the rest of the industry made almost a billion dollars in net profits, an extraordinary feat for a period that includes two of the slowest months of the year: January and February. In the first quarter of 2013, the industry lost $16m net, or managed roughly a $300m net profit ex United.

All this raises scores of questions, but here are a few big ones, with their answers:

What’s behind the sector’s relentless upward earnings momentum? The answer starts with the well documented “Three-C” reforms that reshaped the industry’s revenue producing capabilities: consolidation, capacity cutting and charging for everything. More specifically in this past quarter, declining fuel prices—total outlays fell 5% despite a 1% y/y increase in ASM capacity—also proved immensely helpful. Although preliminary GDP statistics portray a stagnant economy in Q1, other indicators like job gains, a boom in energy production, a rise in consumer spending on services and airline reports of strong domestic demand and rising corporate spend suggest things are actually much better. March, in particular, when the weather wasn’t so disruptive, appeared to be exceptionally strong, as Southwest testified. Give management credit too: think smart business practices like seat densification, variable scheduling, network diversification, dynamic retailing, capex restraint, investment in premium services, overseas joint venture formation and loyalty plan revenue maximization. The industry is performing better operationally too (a credit to management, front-line workers and technology alike) and has a rapidly renewing fleet that’s becoming more rightsized and fuel efficient with each successive quarter. Success, moreover, breeds success as strong profits today lead to lower cost of capital tomorrow.

If things are so good, why are United’s results so bad? To be sure, United has some non-fuel cost problems, clearly evident in its full-year 2012 and 2013 CASM figures, if less so from figures last quarter. “There’s no question that our costs are too high,” it admitted…

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