Fantasy Flick or Horror Film?: U.S. airlines are still earning dreamy profits. But revenue trends are getting scary.
The first quarter of 2016 was another supremely profitable one for U.S. airlines, which walked away with almost $3.4b in net profits, with an unthinkably high 16% operating margin—this during what is generally the most off-peak period of the year. Underneath the surface, however, were some uncomfortable trends, led by revenue weakness that seems to be increasing in severity. At the same time, fuel prices, although still extremely low by the standards of the past decade, are in fact rising steadily—after dipping below $30 a barrel in February, oil prices are now flirting with the $50 mark. Labor costs, meanwhile, are soaring. The U.S. economy barely grew at all last quarter. And Q1 profits were juiced somewhat by unusually good weather and the presence of Easter. Here’s a closer look at some key developments in the early months of 2016:
1) Revenue pressures are mounting: Sure, all U.S. carriers—without exception—continue to earn profits like never before. But listening to American talk about PRASM trends felt more like sitting through a horror movie than a feel-good fantasy flick. Overseas, the Brazilian and Venezuelan markets are catastrophically bad, hurting hubs like Miami. Colombia is bad too, as JetBlue and Spirit noted. Transatlantic markets were disrupted again by terrorism, this time in Brussels. Asian markets were particularly affected by currency and fuel surcharge headwinds. And economies around the world are weak. But revenue weakness wasn’t just an international phenomenon. Domestic yields were down sharply too, in some cases due to economic factors (i.e., Houston) but in most cases due to increasingly unfavorable supply conditions, offsetting otherwise healthy demand—Spirit referred to a “very soft” pricing environment. That’s partly because the Big Three—American, Delta and United—are becoming tactically more aggressive on pricing (more on that in a moment). One big question: Just how closely are fuel prices and fares correlated? At the moment, fuel prices are rising, but fares generally aren’t—and they probably won’t unless airlines begin constricting supply more aggressively. Sure enough, several airlines said demand—although still reasonably strong—is not keeping up with capacity growth, hence lower yields and load factors.
2) The Big Three amplify their attacks on ultra-LCCs, resulting in a bloodier pricing environment: One reason for the weaker domestic revenue trends is indeed tactical: American, Delta and United are making moves to pressure carriers like Spirit…
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