Another Profitable Quarter for Airlines
The first quarter of 2016, ended March 31, follows a year of record profits for domestic airlines. In 2015, the industry collectively logged $25.6 billion in after-tax net profit, more than three times the amount reported in 2014. This was the sixth straight year of profitability, with fuel costs falling 37 percent, from $43.4 billion in 2014 to $26.9 billion.
However, these fuel cost savings, which have been a windfall for the past year and a half, could be growing long in the tooth. The International Air Transport Association (IATA) writes that “we are perhaps coming toward the end of the biggest stimulus to traffic from lower oil prices.”
More people than ever before in the U.S. are now traveling by air, a recent Ipsos Public Affairs/Airlines for America survey found. Eighty-one percent of respondents said they’ve flown at least once in their lives, while 45 percent said they flew at some point in the last three years, up from 39 percent in 1997. This is likely a function of a record stretch of monthly job growth (73 straight months as of March, for a total of 14.4 million jobs), low unemployment (5 percent) and steady to declining airfares. The U.S. consumer confidence index climbed to 96.2 in March, better than the 94 analysts had expected. And big-data travel firm Hopper estimates that summer fares in 2016 will be the cheapest since 2009, which should help boost demand domestically going forward.
Strongest Flight Demand Growth Since 2012
Globally, the air passenger market expanded 7 percent year-over-year in the first quarter, the strongest start to a year since 2012. (The first quarter has historically been the weakest.) This comes despite a subdued economic backdrop, especially in the China market. In the month of March, passenger traffic rose 5.3 percent year-over-year, a moderate slowdown from growth rates in January (7.2 percent) and February (8.6 percent).
More Record Earnings
Earnings in the first quarter revealed continued growth, though, in several cases, at a slower pace than the same time a year ago.
A huge gainer was Southwest Airlines (LUV), which posted a record first-quarter profit of $511 million, a 13 percent increase from a year earlier. Southwest CEO Gary Kelly called it “the best start we’ve had to a year in over two decades.” The low-cost carrier saved $25 million in fuel costs, while its operating revenue climbed 9.3 percent to $4.8 billion, a new quarterly high for Southwest.
Alaska Airlines (ALK) also had a stellar quarter. Besides announcing its acquisition of Virgin America (VA) – a move that’s expected to give the carrier the largest West Coast market share—Alaska reported a record $184 million in profit, up from the then-record of $149 million in the first quarter of last year. Alaska has had record profitability for the past six years.
Delta Air Lines (DAL) reported $946 million in first-quarter earnings, an increase of $200 million from the same time a year ago and beating analysts’ estimates. The carrier reportedly saved $700 million on its fuel bill during the three months ended March 31.
Forth Worth-based American Airlines (AAL) announced $700 million in first-quarter profit on fuel savings valued at $600 million, though it saw a 4 percent decline in its operating revenue to $9.4 billion. The airline attributed this loss to weakness in the Latin American market and lower foreign currencies. In a sign of confidence, American CEO Doug Parker continues to align his own performance and expectations with that of the company’s 100,000 employees. After electing to switch his compensation from cash to company stock last year, Parker announced in April that he would forfeit his golden parachute and become an “at will” employee.
United Continental (UAL) reported a first-quarter profit of $435 million. Though this beat analysts’ expectations, it was down more than 25 percent from $582 million last year. Renvenue also dropped 4.8 percent to $8.2 billion. The decline was attributable to higher taxes, the strong U.S. dollar and a drop in PRASM, or passenger revenue per available seat mile.
Meanwhile, airplane maker Boeing (BA) posted a 9 percent decrease in first-quarter earnings, from $1.3 billion a year ago to $1.2 billion. Products and labor costs reportedly climbed 3.2 percent during the quarter to $19.1 billion, for which the company is getting rid of 4,000 workers in its commerical airplanes division. Further losses came as a result of an investment in a tanker program—which, according to CEO Dennis Muilenburg, is in the middle of a transition—and a 4.3 percent decline in commercial aircraft deliveries.
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The U.S. consumer confidence index (CCI) is an indicator designed to measure consumer confidence, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending.
The Airlines for America survey, conducted in December 2015 by Ipsos Public Affairs, looked at who was traveling by air, why, where and how often; asked travelers to rate their air travel experience; assessed what factors were considered when purchasing travel; examined which components of the passenger experience were most important to them; and asked about their upcoming travel plans.
Passenger revenue per available seat mile (PRASM) is a measure of passenger “unit revenue.” It is calculated by dividing passenger revenue by available seat miles. Typically the measure is presented in terms of cents per mile.