May 2, 2011

Cover Story

Calm in the Lion’s Den: U.S. airlines, with revenues surging despite tepid economic growth, survive a fuel spike

If someone were to make a movie about the history of the U.S. airline industry, one thing it wouldn't lack is action: carriers pummeling each other for scraps of demand—and doing it under a constant downpour of market shocks. It would, of course, be a sad movie, with a lot of worker and investor casualties along the way.

But might such a movie have a happy ending yet? After decades of chaos and crisis, has the U.S. airline industry finally achieved calm in the lion’s den?

A lion’s den the airline industry still is, to be sure. But financial results for the first quarter of 2011 again suggest that U.S. airlines may have tamed the industry’s wildest instincts, positioning themselves to profit even when the shocks come fast and furious. Or to continue the animal analogies, yes the airline industry is still a rodeo of raging bulls. But even with the sharpest jolts of movement—this year’s sudden run-up in fuel prices, for instance—the bull riders aren’t falling off this time.

Indeed, the first quarter was a relatively good one for U.S. airlines. Despite the off-peak nature of the period, an even greater number of one-time disruptions than usual (bad winter storms and the Japan crisis), a still-slow-growing economy, excess capacity on transatlantic markets and a stomach-turning 40% jump in fuel prices, the industry roughly broke even at the operating level (see chart on page six).

For the 11 U.S. airlines that have reported (Frontier and Virgin America are the notable two that haven’t), collective net losses amounted to $944m ex special items. But that was on more than $30b in revenue and compares favorably to the $937m in net losses on less than $28b in revenue (308 of 1,235 words)

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A general formula for success for U.S. airlines: stay near break even in the first and fourth quarters, and make a bunch of money in the second and third. Easier said than done, as the industry’s financial history attests. But the formula worked like a charm in 2010, and early indications suggest it might work again in 2011. Has the U.S. airline industry finally figured out how to stay consistently profitable, even when fuel prices spike 40%, as they did last quarter?

Carriers are undoubtedly comforted by their newfound revenue generating capabilities and the industry’s diminished fragmentation. But nobody’s getting too comfortable just yet, not with rising oil prices weighing on consumer spending and uncertainty lingering about post-summertime demand. Not leaving things to fate this time, several carriers trimmed their autumn and winter schedules.

Airlines outside the U.S. have their own issues to manage. Japan’s All Nippon, confronted with a bewildering array of opportunities and crises, made it out of the off-peak first quarter with modest losses. Chinese carriers, for their part, enjoyed strong demand and the fruits of consolidation. And Latin American carriers continued to cement their position as industry profit leaders.

Not so for Europe’s still-fragmented airline sector. Finnair and especially Norwegian reported dismal Q1 results, perhaps a prelude of things to come. The picture will get a lot clearer when the giants Lufthansa and BA/Iberia report this week.

Also reporting this week: Canadian carriers, Korean carriers, U.S. regionals and many others.

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