Airline Weekly - November 2, 2015
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Airline Weekly - November 2, 2015

Back to the Future: If this were 2005, fuel would look expensive. But in 2015, $50 oil is a party at the pump

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Cover Story

Back to the Future: If this were 2005, fuel would look expensive. But in 2015, $50 oil is a party at the pump

Cheap or expensive? In 2005, as American’s CEO Doug Parker reminded investors during the carrier’s recent Q3 earnings presentation, the WTI price of oil was about $56 per barrel. Lord have mercy, U.S. airlines wailed at the time, en route to a collective industry operating loss of nearly $3b. But that was then. Ten years ago, the industry—in terms of its capacity, fleet, workforce and network—was built for the $20 oil prevailing at the start of the 2000s. Today, the industry is built for the $100 oil seen through much of the prior 10 years, so oil in the mid-$50s is not a curse but a blessing.

How much of a blessing? During the most recent 12 months reported (October 2014 through September 2015), with oil averaging about $56, the 10 largest U.S. airlines (not including regional carriers) earned—no kidding!—$25b in operating profits and a 16% operating margin.

Today’s airline business, remember, also enjoys cost-saving and revenue-enhancing technologies, tools and practices that weren’t widespread 10 years ago: more efficient planes, slimline seats, space-saving lavatories and better IT systems, for example, and tactics like ancillary selling. Overseas alliances have become deeper and more numerous too.

The peak third quarter alone was the U.S. airline industry’s best quarter ever: almost $9b in operating profits and a 21% operating margin, with none of the 10 carriers earning less than 18%. Spirit and Allegiant, with figures approaching 30%, even talked about margins getting too high.

The U.S. profit renaissance, which began at the start of the decade but accelerated greatly with the onset of fuel’s dramatic tumble starting in mid-2014, is certainly the lead story in the chronicle of the current fortunes of U.S. airlines. But other key themes, questions and developments emerged from the just-completed round of Q3 earnings presentations, some of them encouraging and some less so.

Fuel’s fall, of course, has brought airfares down along with it, although less sharply. One reason is simply mechanical: In many international markets, especially Asia, foreign governments automatically mandate lower fuel surcharges when fuel prices decline. Weak foreign currencies like the euro and yen further reduce the amount of U.S. dollars carriers collect for airfares sold abroad as dollar-denominated spending power abroad declines. More substantively, many foreign economies are currently weak, in some cases because their oil and other commodity exports are no longer worth nearly as much, depressing demand for air travel.

Back at home, though, the chief culprit... (432 of 1,730 words)

Also Inside this Issue:

As expected, the sun was shining for Europe’s major airlines this summer, allowing for strong Q3 results, if in most cases not strong by U.S. standards. IAG, though—with its hubs closest to the U.S.—did in fact play in the same league as the U.S. Big Three by scoring a 19% operating margin. As for Air France/KLM and Lufthansa, whatever success they enjoyed this summer comes amid nervousness about labor strife and wobbly forward bookings.

Asia is holding up surprisingly well for Europe’s airlines, Air France’s Japan headaches notwithstanding. Chinese airline demand is clearly resilient, underscored by great summertime success at all of the nation’s carriers. Japanese carriers, too, did well in Q3, albeit with a drag from hedges and a weak yen.

In the bustling U.S. market, JetBlue, blessed by limited exposure to markets with excess capacity, lifted its margins more than anyone else during the past year. For its part, Spirit—causing capacity headaches for others with its voracious expansion—achieved grand slam margins despite freefalling unit revenues. And Virgin America? It’s no longer a lossmaking airline like it was for most of its existence. But its currently-plump profits still underperform those at rivals.

Delta says its Atlanta-Dubai route is underperforming. So it’s gone. But not without a stink. Delta harangued about what it considers unfair Gulf carrier competition.

Competition isn’t the problem in Brazil. Hellishly depressed demand is. But mercifully, Gol said the worst might be over.

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