Airline Economic Analysis 2016

In recent years, the airline industry in the United States produced improved balance sheets, increased valuations, and generated 13 consecutive quarters of profitability with operating margins near or above 10% — all testament to the quality and discipline of the management of this hyper-competitive industry.

But just as domestic airlines are enjoying record profits and restrained operating costs, thanks in large part to below $50 a barrel crude keeping fuel costs low, they’re facing a patch of turbulence ahead that could threaten their bottom-line gains. The most compelling piece of evidence that cracks are developing in the industry’s outwardly successful façade is the recent slide in quarterly revenue among US legacy carriers.

One of the culprits behind the decline is a familiar one: too much capacity coming online at discount prices when the US economy is still growing in the low single digits. Routes between the US and Latin America, where value carriers have been aggressively expanding, have seen the largest growth in new available seat miles over the past five years.

Add to that scenario a likely increase in the industry’s most costly expenses—fuel, labor, and maintenance—and the mounting pressure on the airline bottom line in coming quarters becomes more evident. Many carriers have inked new labor contracts during this highly profitable cycle, the effects from which will begin to be felt in coming years. Also some older aircraft fleets have a wave of life limited parts (LLPs) coming due on the horizon. Finally, while jet fuel prices have remained relatively low since 2014, the specter of potentially rising crude prices looms in the distance after OPEC announced production cuts at the end of 2016.

Going into 2017, carriers will need to exercise some restraint when it comes to capacity additions, and, in their quest for market share, make wise investment decisions that will help differentiate their product and improve the customer experience. Fleet upgrades for newer, more efficient aircraft will help minimize maintenance expense and mitigate future fuel price escalation.

Airline Revenue Driver Dashboard

For each of the airlines in our main report, users can isolate and analyze the individual components that drive airline revenue at the system and region level to see how that carrier performs versus the industry. The revenue drivers include: capacity, load factor, yield, cargo revenue, and ancillary revenue.

To operate the dashboard, first select the carrier to analyze, and then determine if you want to view the entire system or just a portion. Lastly, click the tab for the revenue driver you want to isolate and the comparative analysis will populate.

The data in this tool is kept current based on the most recent data release from the US Department of Transportation (DOT) and is updated quarterly in the dashboard.

1How are carriers coping with the unit revenue decline and can they reverse it?

US airlines have faced increased headwinds on unit-revenue, which is in turn putting pressure on airline profitability. This is due to some lack of capacity discipline, especially involving Latin American routes, where yields have softened. The good news is that future airline schedules currently indicate airlines are acting to maintain a ‘right-sized’ capacity environment that will stabilize unit revenue environment.
2What is happening on the cost front for airlines?

Airlines have been enjoying a very favorable cost position, primarily as a result of steep declines in fuel costs. While just a few years ago fuel represented the biggest cost item for airlines, labor has recently moved into the first position among the cost categories. Labor is subject to continued escalation as new and more expensive labor agreements are ratified and the higher rates creep into calculation. Maintenance costs also are projected to increase especially for older fleet platforms. While costs continue to inch up and need to be well managed, there will not be a step-change increase unless some cost drivers fundamentally change such as fuel costs sky-rocketing.
3With record profitability for the industry, what investments are airlines making?

Given the very strong financial position of the US airline industry, carriers have been heavily investing in improving the customer experience — making the in-flight experience more comfortable, providing free snacks, and improving physical product and seat offerings in premium cabins. Airlines also have been upgrading their fleets with more fuel-efficient, next-generation aircraft.
4What about the airport customer experience? Is it going to improve?

Airlines and airports belong to the same ecosystem, and improving the financial health of one entity has a direct impact on the other. US airports have experienced increased traffic levels and operations and have, therefore, enjoyed increased profitability. Significant airport capital improvement projects are expected over the next five years with terminal re-developments, additional gates, and an enhanced experience for customers traveling through airports. Ultimately, that’s all good news for the industry.

About the Report

In its eighth year, the 65-page report covers a range of aviation industry-specific economic and performance data as well as global capacity growth by region. The report also includes analyses on: