Better Than Great: U.S. airlines are running up the score on profits; revenues are raining down from everywhere

U.S. airlines aren’t just earning big profits. They’re earning bigger profits, bigger with each successive year. Consider this: In the second quarter of 2011, the industry collectively managed a 6% operating margin. Not bad. But the figure jumped to 9% in Q2 2012. And then 10% in Q2 2013. And during this year’s Q2? 14%, by far the industry’s best result in the post-9/11 era.

The nine mainline U.S. carriers that have reported so far (only a few rather small ones like Virgin America, Frontier and Sun Country haven’t) together amassed $4.1b in net profits, excluding special items, during just three months. That’s more than they earned in the 12 months covering all of 2012.

By now you know how U.S. airlines went from rags to riches: consolidation, capacity cutting and charging for everything. But how is it that the rich are getting richer? This is, after all, a world beset by slow economic growth, foreign exchange volatility, high energy prices and geopolitical unrest.

Fortunately for U.S. airlines, their home economy is much healthier than those elsewhere, with initial estimates of 4% GDP growth in the second quarter, driven by consumer spending, business investment, exports and a pickup in local and state government spending, offsetting a 4% decline in non-defense federal government spending (which has predictably depressed air travel in the Washington market). U.S. carriers, of course, are far less exposed to currency swings, with most of their revenues and costs alike in U.S. dollars. This bestows an enormous advantage when it comes to buying fuel, the outlays for which rose just 1% y/y for U.S. carriers last quarter, even though they flew 2% more ASM capacity, which was just half the level of GDP growth. The industry’s rapid fleet renewal is also helping with fuel efficiency.

Stable fuel prices are indeed a major reason why U.S. carriers are not just doing well, but also doing better and better. But this helpful cost tailwind was partially eroded by a 7% spike in the industry’s second biggest cost item: labor. In the end, total operating costs collectively rose 3%, ahead of that 2% capacity expansion.

That’s not too bad. But the bigger story lies on the top line of…

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