Lessons Unlearned: U.S. airlines try to keep the profit party going as economic conditions change yet again

With the possible exception of giant demand shocks like the 2001 terrorist attacks or the 2008 financial meltdown, nothing so dramatically reshapes the fortunes of America’s airlines like an abrupt change in fuel prices. So with fuel now below $2 per gallon for some U.S. airlines, down from more than $3 a year earlier, monumental changes are indeed taking place, in some cases even causing airlines to unlearn some of the lessons of the oil-boom era.

There is no ambivalence about just how good the start of 2015 has been. During the first quarter, normally the weakest period of the year, the 10 major publicly-traded U.S. airlines combined to produce $3.1b in net profits and $4.7b in operating profits, the latter translating to a 13% operating margin, up an extraordinary nine points from the same quarter a year earlier. The industry’s fuel bill declined 28% y/y—an unimaginable drop for a non-crisis period—saving it some $3.2b and enabling even the most strategically troubled carriers to earn solid profits. The fuel savings, moreover, came despite flying more—3% more available seat miles, to be precise.

So far, unit revenues haven’t dropped nearly as dramatically as fuel prices. But make no mistake: they are under pressure. Despite that 3% ASM growth, U.S. airlines managed to grow revenues just 2% even with help from ancillaries. International markets, safe havens for U.S. airlines during the high-fuel era, are now causing grief, for American, Delta and United, anyway. Revenue deterioration in Japan is linked partly to declining fuel surcharges, which are regulated by the Japanese government—if fuel prices fall, so must the surcharges—although supply and demand considerations are still most influential in determining total airfare. Alas, the situation is bad enough that United and Delta are cutting their Japan capacity. Elsewhere in Asia, the once-booming Chinese market is still booming in terms of demand, but Chinese carriers, inspired partly by cheaper fuel, are flooding the U.S. market with new capacity. This too is a problem for U.S. airline revenues.

The Brazilian market is even worse. It boomed when commodity prices were high. Now it’s crumbling as commodity prices fall. Venezuela, an oil market if there ever was one, is barely servable anymore, with government policies making it near impossible for airlines to actually collect the money they earn in the country. Delta felt compelled to leave Moscow for the winter and is struggling with some oil traffic-heavy African and Middle Eastern routes. Lesson unlearned: The strategy of chasing oil money to boost revenues, which mitigated the pain of expensive fuel, no longer works.

The same is true back at home, and…

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To date, 27 airlines have reported their calendar Q1 financial results and—despite the off-peak nature of the period for most carriers—all but four turned operating profits. Oh, the joys of cheap fuel.

Nearly half of the 27 reported not just profits but double-digit operating margins. Nearly half of this elite group, in turn, were U.S. carriers. Most of the other big winners were Chinese carriers, with Japan Airlines also occupying its usual place near the top.

The four money-losers so far all came from Europe, with Norwegian doing worst, undone by a pilot strike and arguably by its own excessive ambition. Aer Lingus and Icelandair were deeply in the red too, but less alarmingly so because of their history of huge summertime profits—in last year’s Q3, they both produced margins roughly 15 points higher than their Norwegian rival.

Air France/KLM, battered by revenue pressures nearly everywhere except the U.S., lost a lot of money too. Its rival IAG (parent of BA, Iberia and Vueling), by contrast, with heavier U.S. exposure and fewer worries about Gulf carriers and shorthaul bloodletting, actually avoided Q1 operating losses, a rare feat for a European airline group. This week we’ll find out how Lufthansa did.

Back in the U.S., JetBlue surprised on the upside with strong Florida, Caribbean and transcon demand, while Virgin America disappointed with results that were woefully low considering the benign environment. Spirit, for its part, never mind sharply falling yields, rode sharply falling costs to another triumphant display of money making.

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