Airline Weekly - January 31, 2011

Cover Story

Revenues to the Rescue: Why exactly did U.S. airlines thrive in 2010, and what lies ahead?

Extreme fuel prices have been eating away at U.S. airlines all decade. But finally, they seem to have found a solution: extreme revenue growth.

Sounds easier said than done. But sure enough, they’ve done it. For all of 2010, America’s eight largest airlines saw their fuel costs jump again, this time by 14% from 2009, even though they increased ASM capacity a mere 1% and burned almost exactly as many gallons of fuel as they did the year before. But revenues came to the rescue, leaping nearly 15% from one year ago, 7% from two years ago and 3% from the boom year 2007.

All the while, non-fuel operating costs last year increased just 4%, leading to a banner year for earnings. The industry’s Big Eight earned a 7% full-year operating margin and a 3% full-year net margin. That’s nothing that would make many of their suppliers or business partners blush. But airlines will take it.

Things got a bit less comfortable in the final quarter of the year. Fuel outlays spiked 16% y/y, but revenues rose only 13%. Still, 13% is nothing to be ashamed of, especially on a mere 5% increase in ASM production. And thanks to ongoing cost control—non-fuel expenses were again up just 4%— the ending was a happy one. The industry’s operating margin for the off-peak quarter was a healthy 5% while net margin was 1%.

During 2009’s fourth quarter, by which time the industry’s recovery was already under way, collective operating and net margins were positive 1% and negative 3%, respectively. The figures were worse the year before that (negative 1% and negative 5%) and not much better even in Q4 2007 (positive 1% and negative 1%). In other words, 2010’s fourth quarter was a strikingly good one. And it would have been better yet had Mother Nature not dumped huge amounts of snow on hubs throughout the northeast and as far south as Atlanta during some of the busiest holiday travel days. The results also don’t include smaller Frontier, Allegiant, Spirit, Hawaiian and regional carriers like SkyWest, Pinnacle and Republic, which often make money but haven’t reported yet. On the other hand, normally loss-making Virgin America isn’t included yet either. So how did America’s largest airlines manage to orchestrate such triumphant revenue growth, the... (401 of 1603 words)

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The good news keeps rolling in from U.S. airlines, never mind the off-peak nature of the fourth quarter. United matched Delta’s solid profits, US Airways came pretty close and Alaska’s results were downright phenomenal. Only AirTran’s were somewhat disappointing.

The news was at least as good in the ASEAN region, where the fourth quarter is a peak period. Singapore Airlines is back to its winning ways while Tiger, which Singapore Airlines partly owns, had even higher margins. Across the Indian Ocean in India, SpiceJet did well. And in northeast Asia, Korean Air had a strong winter and the Japanese LCC Skymark took advantage of JAL’s radical downsizing. The young Juneyao Airlines in Shanghai is also starting to make a name for itself.

Also reporting last week was LAN, which again made the airline business look easy on the eve of its grand merger with TAM—assuming regulators allow it.

If only things were so easy in Europe, where airlines will begin reporting Q4 results this week. They certainly won’t be helped by labor unions—which are now revolting at Aer Lingus—and unfriendly government decisions, the latest blocking Aegean and Olympic from merging.

Catastrophes are never far from the airline business, and last week saw terrorism at Moscow’s Domodedovo airport and a mass uprising in Egypt, a huge tourist destination and home to the rapidly maturing Egyptair. Crises like these remind airlines: though conditions have changed so fast for the better this past year, they can change just as quickly for the worse.

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