Airline Weekly - February 15, 2016
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Airline Weekly - February 15, 2016

Rewriting the Rulebook: U.S. airlines are going back to a few of their old ways—but profitably, this time

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Cover Story

Rewriting the Rulebook: U.S. airlines are going back to a few of their old ways—but profitably, this time

The first quarter of 2016 is shaping up to be another highly profitable one for U.S. airlines, underpinned by still-falling fuel prices and an economy held aloft by strong consumer spending, itself underpinned by cheaper energy, a strong job market and a stable housing market. Carriers can’t help but be spooked, however, by the start of the year’s big stock market losses, tightening financial markets, fears of a Zika epidemic, worries about the oil bust infecting the banking sector and—yes—growing talk of recession. Time will tell what the rest of 2016 will bring, but for airlines, the year certainly started on firm footing—the final quarter of 2015 was again a supremely triumphant one for U.S. airlines, highlighted by 10 trends and developments:

1) Profits were awesome again. Virgin America hasn’t yet reported, and not until May will the Department of Transportation publish Frontier’s data. But once those figures are out, America’s 11 major airlines will have reported something like a whopping $5b in net profits excluding special items during Q4—remember, Q4 is supposed to be an off-peak winter period!—and a collective operating margin of about 17%. That will bring the industry’s full-year 2015 net profit to about $22b and its operating margin to—just as in Q4 alone—17%. Returns on invested capital are stunningly high, cash is flowing in, balance sheets are robust and airlines are perhaps the economy’s biggest winners from the monumental oil bust.

2) Revenues are falling, but not as fast as fuel costs. The degree of correlation might be questioned, but the fact that they’re correlated is not: As fuel prices fall, so do airfares. Cheaper fuel is also leading to higher levels of capacity growth, more off-peak utilization flying, more aggressive price matching against ultra-LCCs and more deeply discounted fares for connecting or flow traffic. So far, the ill consequences of these fare compressing actions are limited because costs are falling even faster thanks to fuel—all reporting U.S. carriers saw their Q4 and full-year operating margins increase y/y, in most cases significantly so. In addition, declines in ticket yields are offset somewhat by still-growing ancillary revenues, led by seat upgrades (helped by the popularity of extra-legroom economy products), gains in ancillary sales through travel agencies and revenues linked to frequent flier programs. And yes, consolidation, although not as influential on industry fares as fuel prices, does afford the Big Three some degree of pricing... (420 of 1,681 words)

Also Inside this Issue:

It’s been a rough start to 2016 for global financial markets, accompanying a further deterioration in global commodity markets. Consumer spending and robust job growth are bright spots in the U.S. But even there, where airlines are basking in profit nirvana, talk of recession is in the air.

Also in the air: more and more Norwegian Dreamliners, advancing a rapid transition from shorthaul to longhaul for Europe’s third largest LCC. Norwegian is still growing within Europe, to be sure. But the next few years will see a return to explosive 40% growth in intercontinental flying. The big question: Can Norwegian overcome a history of poor financial results?

The same question is apt for Virgin Australia. The Brisbane-based carrier turned profitable in the latter half of 2015, but it’s at Qantas where the real turnaround is underway.

The pioneering U.S. ultra-LCC Spirit continues to produce outstanding profits—but with significant revenue pressure that worries its new CEO. He doesn’t plan any big changes, but he’ll work to improve customer service and target new routes that could, intriguingly, put Spirit more into direct conflict with Southwest and Allegiant.

Ryanair is moving into direct conflict with Lufthansa and Eurowings by amassing armies of new routes and planes from Berlin, Hamburg, Nuremburg and Cologne.

Lufthansa won’t report its Q4 financial results until next month. But its rival Air France/KLM headlines a list of several carriers reporting this week, a week in which the U.S. and Japan will discuss whether to allow more U.S.-Tokyo Haneda flights.

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