Top-Line Turbulence: U.S. airlines are quietly showing some cracks in their revenue armor as fuel prices fall

For a quarter so good, there was an awful lot of talk about revenues turning bad.

American, Delta, United, Southwest, JetBlue, Alaska, Hawaiian, Spirit, Virgin America and Allegiant—10 of the 11 largest U.S. mainline carriers (privately-held Frontier hasn’t yet reported)—all made money last quarter. A lot of money. More precisely, they combined to produce nearly $3b in net profits (excluding special items) for the off-peak fourth quarter, with an operating margin of 12%. How good is that? Put it this way: Since the 9/11 terrorist attacks in 2001, U.S. airlines had never, until 2014, managed a margin that high even in the peak third quarter!

The full-year results were just as impressive. U.S. airlines enjoyed their best year of the post-9/11 era, with net profit ex items approaching $12b and operating margin reaching 11%. For both the quarter and the full year, moreover, all 10 carriers improved their operating margins y/y, with revenues rising strongly on the back of roaring domestic demand and—most helpfully—costs falling thanks to a sharp decline in fuel prices late in the year. In the fourth quarter of 2013, WTI oil prices averaged $98 per barrel. This fourth quarter they averaged just $73.

It is worth noting, though, that oil averaged a rather high $93 for all of 2014 even including the end-of-year tumble, not much lower than 2013’s $98. Bullish revenues, in other words, were at least as important to U.S. airline success in 2014.

It’s with some measure of nervousness, therefore, that in the past few weeks—either while presenting their fourth quarter results or offering updated investor guidance thereafter—nearly every U.S. airline warned of revenue pressures. True, the outlook is still cheerful on the cost side, with oil averaging just $47 in January, rising to just above $50 so far this month. And unlike their peers abroad, U.S. carriers are reaping most of the bonanza, hedges notwithstanding, rather than losing a large chunk to adverse currency movements. Also unlike their peers abroad, U.S. carriers are enjoying both a fuel holiday and a revenue boom, supported by a strengthening home economy.

So what’s this about revenue pressures? Is the revenue boom crumbling?

Nobody has really said so explicitly. But take American. During a discussion of its Q4 results, executives highlighted new non-stop competition in 50 markets, 44 of them in which the challenger was a low-cost carrier. Another five markets have new competition in the current January-to-March quarter. Spirit…

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