Seeking the Secret Cost Sauce: Investors are more focused than ever on revenue. But U.S. airlines aren’t forgetting costs.
Do U.S. airlines have cost concerns? You’d better believe it. Last quarter, the industry saw its operating expenses swell 11%, far above its 2% increase in revenues.
So what’s to be done?
Getting most attention is the collection of revenue weapons airlines are developing to offset their cost creep. It’s an impressive list, no doubt: joint ventures, billion-dollar credit card partnerships, new premium services, revamped fare structures, improved hub connectivity and so on. But carriers are just as vigorously—if more quietly— advancing an array of costcutting tactics.
The industry’s cost anxieties have most to do with labor costs, which have overtaken fuel costs as the No. 1 cost item. Wages are surging as workers—asked to surrender a lot when times were bad—reassert their bargaining power now that times are good. The latest Delta pilot contract, for example, granted an 18% wage hike for 2016 plus another 3% to 4% annually after that. Comparatively tiny Allegiant’s pilot costs will rise roughly $300m annually in the next few years. Last quarter, in fact, Spirit was the only U.S. airline whose revenues rose more y/y than its labor costs. And that’s only because it hasn’t yet reached a new deal with its pilots.
Fuel costs are, of course, a never-ending concern for airlines. Sure enough, these too spiked last quarter. More predictable is a rise in airport costs, supporting expensive new terminal upgrades at airports like New York LaGuardia, Seattle, Los Angeles and Chicago O’Hare. By not growing capacity much, meanwhile, airlines are unable to spread their rising fixed costs over many more seat miles, losing out on an opportunity to lower unit costs. And U.S. carriers are spending like never before on service enhancements— suites on Delta and JetBlue don’t come cheap, nor do the extra spare aircraft Spirit and Allegiant are allocating to improve their reliability.
That said, U.S. airlines are making the most of their new labor agreements, in some cases securing productivity improvements in exchange for the wage benefit increases. This can help moderate cost inflation by enabling more efficient crew scheduling, for example, or in Alaska’s case the right to outsource some E-Jet regional flying. Profit sharing—even if not all airlines are crazy about it philosophically—at least makes an airline’s cost base more variable than fixed. Delta says half of its total…
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