Time to Panic?: Not quite, but things are starting to feel a bit uncomfortable for U.S. airlines

Few expected 17% to be the new norm. That was the U.S. airline industry’s collective operating margin for all of 2015, when just about everything was going right, most importantly extremely low fuel prices, solid demand and conservative capacity and pricing policies still mostly in place from before the onset of cheap oil. Margins seemed bound to fall from such lofty heights, and so they did in 2016, but only ever so slightly to 16% —this alarmed no one.

Developments in 2017, however, feel a bit more discomforting. All U.S. airlines, to be sure, continue to earn profits that would have been considered extremely strong earlier this decade, and certainly during last decade’s dark days of distress. Balance sheets are healthy. Nobody is talking about bankruptcy. But during the most recent four quarters, margins are down below 14%. For most airlines, margins have been declining y/y for five straight quarters. And based on some bearish forecasts for the current quarter, 2017 could end up producing an industry operating margin not much better than the 11% achieved in 2014, when average oil prices still exceeded $90 per barrel, versus $49 during the first three quarters of 2017. What’s causing airline earnings to drop at an uncomfortable rate, and what’s still going right? Here’s a look at some of the key trends and forces currently shaping the U.S. airline landscape:

The economy is humming: With stock markets booming, unemployment low, interest rates low, inflation low, the housing market steady, international markets recovering, energy prices moderate, a pickup in business investment and confident consumers, demand for air travel among households and corporations is as good as it has ever been. The U.S. economy grew 3% y/y in Q3 despite multiple hurricanes. And growth is even higher in many areas where airlines fly a preponderance of their capacity, such as the west coast, the northeast, Florida and even Texas, notwithstanding the oil bust. Last year, the San Francisco Bay area economy, including Silicon Valley, grew almost 6%.

In many areas, revenue momentum is bullish: With an economy so good, it’s no surprise to hear carriers speak with delight about demand in places like Seattle and California. The transatlantic market was better than expected, with notable strength in the important London premium market—Air Berlin’s…

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