Back to the Future: If this were 2005, fuel would look expensive. But in 2015, $50 oil is a party at the pump
Cheap or expensive? In 2005, as American’s CEO Doug Parker reminded investors during the carrier’s recent Q3 earnings presentation, the WTI price of oil was about $56 per barrel. Lord have mercy, U.S. airlines wailed at the time, en route to a collective industry operating loss of nearly $3b. But that was then. Ten years ago, the industry—in terms of its capacity, fleet, workforce and network—was built for the $20 oil prevailing at the start of the 2000s. Today, the industry is built for the $100 oil seen through much of the prior 10 years, so oil in the mid-$50s is not a curse but a blessing.
How much of a blessing? During the most recent 12 months reported (October 2014 through September 2015), with oil averaging about $56, the 10 largest U.S. airlines (not including regional carriers) earned—no kidding!—$25b in operating profits and a 16% operating margin.
Today’s airline business, remember, also enjoys cost-saving and revenue-enhancing technologies, tools and practices that weren’t widespread 10 years ago: more efficient planes, slimline seats, space-saving lavatories and better IT systems, for example, and tactics like ancillary selling. Overseas alliances have become deeper and more numerous too.
The peak third quarter alone was the U.S. airline industry’s best quarter ever: almost $9b in operating profits and a 21% operating margin, with none of the 10 carriers earning less than 18%. Spirit and Allegiant, with figures approaching 30%, even talked about margins getting too high.
The U.S. profit renaissance, which began at the start of the decade but accelerated greatly with the onset of fuel’s dramatic tumble starting in mid-2014, is certainly the lead story in the chronicle of the current fortunes of U.S. airlines. But other key themes, questions and developments emerged from the just-completed round of Q3 earnings presentations, some of them encouraging and some less so.
Fuel’s fall, of course, has brought airfares down along with it, although less sharply. One reason is simply mechanical: In many international markets, especially Asia, foreign governments automatically mandate lower fuel surcharges when fuel prices decline. Weak foreign currencies like the euro and yen further reduce the amount of U.S. dollars carriers collect for airfares sold abroad as dollar-denominated spending power abroad declines. More substantively, many foreign economies are currently weak, in some cases because their oil and other commodity exports are no longer worth nearly as much, depressing demand for air travel.
Back at home, though, the chief culprit…
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