Issue No. 706

U.S. Airline Revenues Find Success and Revitalized Revenues

A sharp drop in fuel prices midway through the fourth quarter was welcome. But it didn’t prevent U.S. airlines from paying 24% more for their fuel this Q4 versus last. So once again, industry margins declined. But not much.

The country’s nine largest scheduled airlines that have reported (Frontier hasn’t yet done so) collectively earned a 9.7% Q4 operating margin, down just slightly from 10.4% a year earlier. Full-year margins fell more substantially, to 10.4% from 13.1%. But by the second half of 2018, industry fares began firming, helping to offset much — but not all — of the steady fuel inflation that persisted through mid-October.

Better pricing helped mitigate ongoing labor cost inflation too. In Q2 and Q3, not one major U.S. airline managed to increase its margins year over year. But by Q4, a few — led by Spirit — did.

The big story last quarter was indeed stronger revenue trends, aided by firmer pricing. As airline executives often say, revenues eventually catch up to higher fuel prices — it just takes time.

But maybe too much time. Because remember that 10.4% operating margin for all of 2018? Well, it was the worst industry figure since 2013. That said, anyone with memories of last decade will feel supremely pleased with double-digit industry margins of any kind, even if just 10%. Sure, 2015’s 17% operating margin was nice. But replicating that every year is hardly the measure of success.

Maybe a better measure of success is comparing U.S. airlines with their counterparts abroad. In that regard, they’re still big winners, still benefiting from the consolidation that European airlines now seem eager to mimic.

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