Rewriting the Rulebook: U.S. airlines are going back to a few of their old ways—but profitably, this time

U.S. AirlinesThe first quarter of 2016 is shaping up to be another highly profitable one for U.S. airlines, underpinned by still-falling fuel prices and an economy held aloft by strong consumer spending, itself underpinned by cheaper energy, a strong job market and a stable housing market. Carriers can’t help but be spooked, however, by the start of the year’s big stock market losses, tightening financial markets, fears of a Zika epidemic, worries about the oil bust infecting the banking sector and—yes—growing talk of recession. Time will tell what the rest of 2016 will bring, but for airlines, the year certainly started on firm footing—the final quarter of 2015 was again a supremely triumphant one for U.S. airlines, highlighted by 10 trends and developments:

1) Profits were awesome again. Virgin America hasn’t yet reported, and not until May will the Department of Transportation publish Frontier’s data. But once those figures are out, America’s 11 major airlines will have reported something like a whopping $5b in net profits excluding special items during Q4—remember, Q4 is supposed to be an off-peak winter period!—and a collective operating margin of about 17%. That will bring the industry’s full-year 2015 net profit to about $22b and its operating margin to—just as in Q4 alone—17%. Returns on invested capital are stunningly high, cash is flowing in, balance sheets are robust and airlines are perhaps the economy’s biggest winners from the monumental oil bust.

2) Revenues are falling, but not as fast as fuel costs. The degree of correlation might be questioned, but the fact that they’re correlated is not: As fuel prices fall, so do airfares. Cheaper fuel is also leading to higher levels of capacity growth, more off-peak utilization flying, more aggressive price matching against ultra-LCCs and more deeply discounted fares for connecting or flow traffic. So far, the ill consequences of these fare compressing actions are limited because costs are falling even faster thanks to fuel—all reporting U.S. carriers saw their Q4 and full-year operating margins increase y/y, in most cases significantly so. In addition, declines in ticket yields are offset somewhat by still-growing ancillary revenues, led by seat upgrades (helped by the popularity of extra-legroom economy products), gains in ancillary sales through travel agencies and revenues linked to frequent flier programs. And yes, consolidation, although not as influential on industry fares as fuel prices, does afford the Big Three some degree of pricing…

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