Ten years ago, in the fall of 2003, the U.S. airline industry was in crisis. The fallout from the 9/11 attacks hadn’t fully dissipated. The U.S. economy was just emerging from recession. War in Iraq was sapping demand for international air travel. Fuel prices spiked. The U.S. dollar was depreciating, giving a competitive cost advantage to overseas rivals. Excessive industry fragmentation meant excessive competition. And all major legacy airlines were cutting pay, cutting investment, losing money and fighting for survival.
What a difference a decade makes.
In 2013, for the fourth straight year, U.S. airlines are making money—and they’re doing so with stronger balance sheets, refreshed fleets, upgraded products, new sources of non-ticket revenue, less volatile fuel prices, less fragmentation, milder competition, strength relative to foreign rivals and a steady if slowly growing home economy. No longer, moreover, are airlines the vehicle for a massive transfer of wealth from workers and investors to consumers and oil suppliers. Indeed, American air travelers might be getting more for their money these days—better products, better networks, better on-time performance and so forth. But as the DOT data clearly show, average roundtrip domestic airfares are up about 6% compared to three years ago, and that’s adjusted for inflation. Oil suppliers are still getting a king’s ransom for their product, but prices are stable and—lately, at least—softening. Meanwhile labor and capital, so often at odds in an economy, tend to win and lose together in the airline business. And at the moment, both are winning.
To the delight of those providing the sector with equity, U.S. airline shares have soared during the past year (see page 10). Delta and Alaska Airlines are now paying regular dividends to their stockholders, joining longtime dividend payers Southwest and SkyWest. While becoming a more investible industry, furthermore, all of its publicly traded companies are enjoying profits this year. The regional carriers SkyWest and Republic and non-public Virgin America haven’t yet reported Q3 results. But everyone else collectively earned a $3.2b net profit excluding special items and a double-digit 11% operating margin for the three months ending in September, boosting revenues 6% y/y while holding operating expense growth to just…
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