In 2017, airline industry labor costs rose as new contracts were signed. Oil and fuel prices edged up. No matter: Pent-up demand for air travel and restraint in adding capacity are keeping U.S. airlines — both network and value carriers — in the black.
Through the second quarter of 2017, the airlines had enjoyed 17 straight quarters of profitability. That year, not only was operating revenue up — to a combined $2.4 billion — but for the first time in a while, combined passenger yield (the measure of the average fare paid per mile, per passenger) was rising as well, according to the latest Oliver Wyman Airline Economic Analysis.
A return to growth in passenger yield is an example of the industry’s resilience. Passenger yield fell double digits from 2014 through 2016, hitting a year-over-year low in third quarter 2016 of 13.4 cents. The system-wide yield by second quarter 2017 was 13.9 cents, after finally beginning to rise.
Capacity Discipline
The good news on yield reflected decisions made by network carriers like Delta, United and American to limit the number of seats or routes they added to domestic operations. Where in the past network carriers often matched value player increases in capacity, network airlines resisted this year, and the strategy to limit expansion was rewarded with a boost in domestic revenue of $614 million year-over-year through Q2 2017. This increase was attributable to the consequent rise in yield, which contributed more than one-half of the year-over-year revenue rise. The total above-the-line gain for network players on domestic operations for the period was $1.153 billion.
For value carriers, the formula for success was doing the exact opposite — adding capacity at a rate faster than growth in gross domestic product (GDP). The 7.2 percent rise in available seat miles (ASMs) for domestic operations added $496 million of the $618 million in revenue, or almost $8 out of every $10 of the gain. Not surprisingly, the increase in yield for many of the value carriers was much more modest than that of the network group.
Internationally, both network and value airlines added to capacity, as the majority of growth in demand is being experienced in Asia, Latin America, and Eastern Europe. While network carriers added a modest three percent, value players boosted available seat miles nine percent, with a heavy emphasis on the Caribbean and Latin America — although it should be noted that the value carrier share of the international market is relatively small. Projections for growth in worldwide air travel demand are outpacing not just economic activity in developed nations, but even the faster growth expected in places like China.
While the industry is relatively strong it is also changing in structure, with value carriers playing a larger role. The biggest value airlines — Jet Blue and Southwest — have grown so much that they are starting to have less in common with the ultra low-cost carriers like Spirit than they do with network players. Where network airlines accounted for 82 percent of revenue in 2008, they dropped to 75.5 percent in 2017. Network players increased total operating revenue from domestic and international operations by $1.7 billion, or 6.5 percent, through 2017’s second quarter, while value carriers increased year-over-year operating revenue 8.9 percent, or $736 million, in the same period.
The bottom line of the 2017-2018 AEA report is a relatively optimistic one for the U.S. airlines, with the one cloud on the horizon being rising unit costs. Reversing a multiyear trend, these costs were up 5.4 percent for all airlines in second quarter 2017 — 6.1 percent for network players and 4.5 percent for the value contingent.
Impact of U.S. Tax Cut
While the international air travel scene has the potential to sizzle as burgeoning middle classes in emerging markets look to travel, a profitable future in the United States looks more closely tied to the ability of the industry to contain capacity growth and keep a laser-focus on costs. That said, the recently passed U.S. tax legislation has the potential to boost revenue at airlines catering to business travel, such as the big network carriers. The extent of the law’s impact depends on how much American companies use savings from the tax cut to increase business travel. Some airlines may also see tax savings of their own at some point in the future, thanks to the new law.
