Issue No. 735

The Dallas Miracle

For U.S. airlines, something profound happened in 2014, something that would change the fortune of the industry more than anything else. What was it? Fuel prices plummeted late that year. And they’ve remained low since, at least relative to the $100-plus-per-barrel prices that prevailed from 2011-2013.

All U.S. airlines benefited, not least Allegiant, the most profitable U.S. airline in the post-fuel bust period—in the four years from 2015 through 2018, Allegiant’s operating margin was close to 22%. But with less than 1% of the industry’s total revenues over the period, it’s a niche player. Among bigger players, three carriers are in a virtual tie for top ranking. Spirit, also rather small, earned a 17.7% operating margin over the same four years. Ditto for Alaska, a much larger airline. Right behind them, with a 17.5% margin: the country’s largest domestic airline, Southwest.

The triumph of the ultra-low-cost carriers is its own story. Alaska’s success from its fast-growing perch in Seattle is another. Arguably most interesting of all, however, is how the most successful company in airline history, with roots dating back to the early 1970s, remains so formidable today. In 2017 by the way, as fuel prices began rising again (modestly), Southwest surpassed Spirit, with an operating margin more than a full point higher. In 2018, it surpassed Alaska too.

Throughout the 1980s and 1990s, Southwest was in a profit league of its own thanks to its unbeatably low costs. In the tumultuous first decade of the 2000s, armed with lucrative fuel hedges, it thrived as rival after rival went bankrupt. This decade, after a few middle-of-the-pack margins early on, it’s ending up once again the superman of the industry.

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