There were two dominant themes in the U.S. airline business during the opening quarter of 2018: 1) Demand was red hot, and 2) Fuel prices were way up. Unfortunately, trend two was stronger than trend one, which meant all of the country’s mainline airlines except one saw their operating profit margins decline y/y despite this year’s helpful presence of Easter demand. The one exception was Southwest, whose y/y result was flat, but mostly because of all the money it lost on wrong-way fuel hedges a year ago. SkyWest, meanwhile, a regional carrier that generates more revenue than even Hawaiian or Spirit, was alone among America’s publicly-traded airlines in seeing margins increase as partners like United and American pursued more outsourced small-city traffic feed for their hubs. SkyWest is paid simply to fly, with its mainline partners absorbing the risk of changing fuel prices and airfares.
Putting aside SkyWest and its distinct business model—and putting aside privately-owned Frontier and Sun Country, which haven’t yet disclosed their Q1 results—America’s nine major airlines ended Q1 with a collective net profit of $1.7b and an operating margin of 7%. That’s further evidence that American CEO Doug Parker is right: This time really is different, and U.S. airlines really can make money with consistency, even when fuel costs are up significantly during the most offpeak quarter of the year. But the performance was also evidence of a sector in steady decline from its 2015 peak, when fuel prices dropped like a rock and demand was already pretty good. That year, the industry earned a 13% operating margin. With fuel still falling in early 2016, Q1 operating margin that year jumped to a stunning 16%. In Q1 2017, the figure dropped to 9% before falling further to this year’s 7%.
The other big difference between now and the fat years of 2015 and 2016, of course, is the impact of expensive new labor contracts, negating the benefits of other efficiencies in areas like fleet renewal, fleet densification and fleet upgauging. Carriers always knew better than to expect that their non-fuel costs would forever remain as low as they were in the 2015-16 golden years, in which bankruptcy-era labor contracts were still widespread. So they needed to find as many new revenue sources as possible, all the more so as fuel prices started rising again just as new labor deals…
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