Airline Weekly - October 31, 2011

Cover Story

Nothing But Net: Despite a weak economy and another fuel spike, U.S. airlines continue to stay profitable

At IATA’s World Passenger Symposium in Singapore earlier this month, Montie Brewer played the pessimist. The former United executive, who subsequently ran Air Canada, gave five reasons why the airline industry “will never be profitable:” constant overcapacity, product commoditization, volatile input costs, excessive labor leverage and the simple fact that nobody wants it fixed—governments, suppliers and travelers all benefit from the status quo.

Sure enough, the industry’s financial record during the past several decades seems to justify this pessimism. But in the U.S. anyway, airlines are making the case that they’ve solved this ancient dilemma, earning solid profits even during bleak economic times coinciding with extreme oil prices. For the third quarter of 2011, 10 U.S. airlines (Frontier and Virgin America haven’t yet reported) collectively earned a $1.9b net profit excluding special items, along with an 8% operating margin. True, this was down from $2.6b and 11% during the third quarter of 2010. But 2010 was one of the best years ever for the airline industry, powered by the post-recession recovery and manageable fuel prices. This summer, as jet fuel spiked 46% y/y, the industry’s operating costs increased an uncomfortable 14%. But fare hikes, ancillary selling and a brief tax holiday came to the rescue, pushing revenues up by 10%.

The constant overcapacity in Brewer’s thesis no longer describes the supply and demand balance in the U.S. Consolidation has calmed the industry’s historic propensity to over-expand, creating several disciplined behemoths from scores of airlines with limited scale and geographic reach. US Airways goes one step further and argues that management teams in the U.S. have become more professional and conservative than they were in the past, focusing less on world domination and more on balance sheet stewardship. Persistently high fuel prices too, unmitigated by foreign exchange benefits as is true for (322 of 1,328 words)

Also Inside this Issue:

Qantas, the world’s tenth largest airline by revenues, completely grounded its mainline operations over the weekend as labor tensions boiled over, causing travel havoc in Australia and disruptions throughout the world. The cost to Qantas: an estimated $20m per day.

The news was happier for airlines reporting third-quarter financial results. Most earned relatively healthy profits despite a large run-up in y/y fuel prices. And most continue to see positive demand trends despite a litany of worrisome economic headlines. Even Lufthansa, whacked left and right by eurozone woes and government lashes, managed a decent summer.

U.S. airlines are enjoying a golden age of sorts, having learned to cope with high fuel prices and a sagging home economy. Chinese and Latin American airlines are also benefiting from a U.S-like decline in industry fragmentation—but in the context of faster economic growth.

In terms of economic growth, or lack thereof, Japan looks more like the U.S. But despite that reality, and despite the spring’s devastating earthquake, All Nippon is on top of its game. The strong yen had something to do with that. But so, more importantly, did downsizing by Japan Airlines.

All Nippon is also in the mainstream media spotlight. All eyes were on Tokyo last week as ANA operated its first B787 flight with paying passengers (to Hong Kong). It marks the beginning of a new era for air travel and a new tool for airlines to impress passengers, connect the continents and hopefully make some money in the process.

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