Spilled mustard on your Gucci bag? You’ve got a rich person’s problem. Crashed your Lamborghini? You’ve got a rich person’s problem. Earn an 18% profit margin, but worried about falling revenues? You’ve got the problems of an industry making more money—a lot more money—than it ever has.
Welcome to the U.S. airline sector in 2016, whose peak third quarter was indeed characterized by a collective 18% operating margin, underpinned by almost $5b of net profits. Sure, revenues shrank 2% y/y as tough competition, 3% ASM capacity growth, sluggish domestic corporate demand, lingering international weakness and cheaper fuel led to falling fares. And all the while, total operating costs increased 1%, meaning margins were worse this summer than last. But the larger point is that all of America’s airlines are still thriving to an extent few could have imagined a decade ago. This time really does appear to be different.
All publicly traded U.S. carriers have now reported their Q3 results. (The U.S. DOT will publish figures for non-public airlines, like Frontier and smaller Sun Country, in mid-December.) And with the release of these results came the emergence of some key themes that now loom large as airlines reflect on the summer and look forward to the winter:
1) Revenues declined overall but strengthened late in the quarter: Fare battles were rife during the peak summer months of July and August. But determined to get y/y unit revenues growing again, larger carriers began scaling back capacity in the fall, which helped lift close in business travel bookings on domestic routes, most importantly.
2) Labor costs are spiking: It’s no surprise that with fuel prices down, labor costs are up—this inverse relationship between the industry’s two largest cost items has a long track record. The correlation, however, is not a direct one. Fuel prices can change sharply and suddenly, while labor costs are much stickier. This implies bottom-line windfalls when fuel prices collapse overnight while concessionary-era contracts linger— that was the story of 2015—and financial disaster when fuel prices spike while boomtime contracts linger—this was the story of the mid-2000s. A new round of rich contracts are now taking hold, with industry labor costs up 10% y/y in Q3 and more new…
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