Most U.S. Airlines Are Doing Better Now Than Before the Oil Bust

For U.S. airlines in the peak third quarter, y/y revenue growth (8%) comfortably exceeded capacity growth (5%). But that wasn’t enough to lift the industry’s profit margins, which dropped again y/y as total operating costs outgrew both, rising 12%. No matter how successful carriers were in raising fares, charging new fees and squeezing more yield through tighter revenue management, they couldn’t escape the reality that the fruits of these efforts take time to materialize. Fuel prices, by contrast, change immediately.

And so they did this summer, swelling the sector’s fuel bill some 37% y/y. As a result, America’s nine major publicly traded airlines managed a Q3 operating margin of just 11%, down from almost 15% a year ago, 18% two years ago and 21% three years ago. Even four year ago, before the oil market’s collapse, U.S. carriers achieved 14%. The last time they posted an operating margin as low as 11%? That was 2013, when carriers were paying an average fuel price of $3.12 per gallon. They paid only $2.30 in this year’s third quarter, and the economy was better too. Then why were Q3 margins nearly identical in 2013 and 2018? Mostly because of today’s more expensive labor contracts. What other trends and developments emerged from the latest round of earnings reports? Some highlights:

Demand was—and remains—exceptionally strong, almost everywhere. But most helpfully, it was extremely strong among longhaul premium travelers. That’s especially true for transatlantic routes, where U.S. dollar boosted U.S.- originating traffic to Europe, while transatlantic routes benefited more broadly from ever deepening joint ventures, the rollout of basic economy fares, last year’s demise of Air Berlin and new products like premium economy. Premium demand on Asian routes was no less robust, with few if any signs of distress from trade wars. Back at home, the same degree of robustness characterized transcontinental routes. Also healthy: Florida and Caribbean tourism, a key driver of success for America’s low-cost carriers. Business travel-oriented carriers enjoyed the corporate world’s enthusiastic appetite for travel, especially from wealthy mega-cities like New York, Chicago, Los Angeles, San Francis…

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