US Airlines Near Profit Parity With National Average

On August 17, US airline trade organization Airlines for America (A4A) announced that, in the first half of 2016, the USA’s top ten mainline passenger airlines cumulatively reported pre-tax profits totaling $12bn.

On August 17, US airline trade organization Airlines for America (A4A) announced that, in the first half of 2016, the USA’s top ten mainline passenger airlines cumulatively reported pre-tax profits totaling $12bn.

This figure represented a 15.5 per cent return on revenues, the airlines’ average return exceeding by 1.4 percentage points the US top ten’s average 14.1 per cent pre-tax return in 2015.

This excellent first-half 2016 performance resulted in part from a 1.9 per cent year-over-year drop in operating expenses, falling fuel prices making up for increased labor, aircraft and airport costs, according to A4A.

The 2016 first-half 15.5 per cent pre-tax return is highly significant for the USA’s top 10 mainline passengers airlines (in alphabetical order, they are Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and Virgin America).

That is because, according to John Heimlich, A4A’s chief economist, the 14.5 average pre-tax return the ten carriers collectively achieved in 2015 provided the narrowest gap ever between the mainline US passenger airline industry and the average pre-tax return achieved by all US companies. In 2015, the US national corporate average return was 16.5 per cent.

“For the first time since the Great Recession, airlines are finally achieving profit margins on par with the average U.S. corporation,” an August 17 A4A news release quoted Heimlich as saying.

Should the top ten US mainline passenger carriers achieve a similar collective average return for the second half of 2016, this would mean they would be within spitting distance of achieving the US national corporate average return for the first time in nearly a decade.

It looks like this might be possible. “On the heels of this summer’s record volumes and falling ticket prices, A4A anticipates a commensurate increase in the number of flyers for the Labor Day period,” Heimlich said.

Although A4A says average ticket prices have fallen throughout 2015 and 2016 (by 5.2 per cent in 2015 and 6 per cent so far in 2016), Heimlich projected that US scheduled carriers would carry 4 per cent more passengers over the seven-day peak flying period around Labor Day, the public holiday which traditionally signals the end of the US summer holiday season.

Altogether, forecast Heimlich, US scheduled-service carriers would fly 15.6 million passengers in the week-long peak 2016 Labor Day period from August 31 through September 6.

During the period, US scheduled carriers will offer 2.54 million passenger seats a day on average, over 98,000 a day more than they did in the 2015 Labor Day peak, according to A4A.

On average, A4a expects US scheduled carriers to fly 2.23 million passengers a day on average throughout the seven days – 82,000 a day more than they did in the 2015 peak Labor Day period.

A4A expects Friday, September 2 and Thursday, September 1, respectively, to be the two busiest days of this year’s Labor Day peak period.

Expanded schedules and continuing declines in air fares are driving the projected increase, according to the organisation. But what do these vigorous US passenger airlines’ profitability and traffic performances mean for passengers?

“Customers, employees and investors are benefiting every day from a financially healthy airline industry that is able to invest in the products, technologies and amenities the traveling public values,” the A4A news release quoted Heimlich as saying.

According to A4A, the benefits have been manifested by the top 10 US airlines collectively reinvesting $9 billion in the first half of 2016 – $1.5bn per month – to enhance the customer experience, primarily through acquiring new aircraft.

These 10 carriers are taking delivery of 366 new aircraft over the course of 2016, according to A4A.

On-board investments are including larger overhead bins, lie-flat seating in selected cabins, AC and USB outlets, expanded Wi-Fi and in-flight entertainment systems, and investments in other benefits, the organization says.

The ten airlines are also investing in the passenger experience on the ground, by improving airport check-in areas, gate amenities, ground equipment and baggage systems.

According to A4A, the top ten’s investment in their workforces has also increased, employee wages and benefits rising 35 per cent since 2010, from $2.55bn per month to $3.44bn.

Passengers have responded positively to these new investments, A4A says. In May, market research firm J.D. Power reported airline customer satisfaction as being at a 10-year high and in April the American Customer Satisfaction Index (ACSI) for US airlines reached its highest level in 22 years.

“The findings of these two independent reports are consistent with those of the December 2015 Ipsos survey commissioned by A4A, which indicated that 80 per cent of 2015 flyers were satisfied with their overall travel experience,” A4A noted.

Additionally, A4A said in its news release, “US airlines improved operational performance in the first half of the year to post a completion factor of 98.75 per cent (up from 97.83 per cent in 2015) and an on-time arrival rate of 82.02 percent (up from 77.67 in 2015).

“According to the [US] Department of Transportation (DOT), 99.74 per cent of passengers had their bags properly handled and oversales decreased to 0.62 per 10,000 customers.”

Among the reasons for US airlines improving their performance “in each of DOT’s core operational metrics” were “the investments carriers continue to make in newer, larger aircraft, enhanced IT systems, procedures and staffing”, according to Heimlich. “These investments are a reflection of the U.S. airlines strong commitment to continue innovating and growing to better meet the needs of the traveling public.”

No doubt this represents excellent news overall for passengers on US scheduled carriers and the US airline industry in general, particularly if average fares continue to fall but strong traffic helps boost the carriers’ profitability and returns on pre-tax income.

But the A4A’s crowing about the performance of its member airlines does make one wonder why the three largest US passenger carriers – and the largest European carriers, the US airlines’ partners in today’s antitrust-immunised transatlantic joint ventures – continue to try to keep Norwegian Air Shuttle’s long-haul subsidiaries from obtaining DOT approval to fly to the USA.

Those airlines, which nowadays control upwards of 80 per cent of all scheduled passenger traffic on North Atlantic transatlantic routes, are playing Russian roulette by continuing to try to prevent relatively tiny Norwegian from increasing its Europe-USA network.

The European Commission recently indicated its severe displeasure that the DOT had not yet approved Norwegian International and another Norwegian long-haul subsidiary’s requests to fly to the USA, more than two years after Norwegian’s subsidiaries had first applied.

When the subsidiaries did so, the three largest US carriers and their pilot unions had reacted ferociously to protect their North Atlantic near-monopolies by filing complaint after complaint against the applications. These complaints stalled the applications very effectively.

However, the European Commission (EC), the EU’s regulatory arm, recently threatened action under the EU-US Open Skies Treaty if the DOT didn’t act quickly to approve Norwegian’s service applications.

The EC was particularly incensed by the DOT’s continuing tardiness because the DOT had announced it had found no legal grounds to deny Norwegian’s subsidiaries’ applications, and it awarded tentative approval for them.

But still no final approvals have been forthcoming from the DOT, perhaps because this is a US presidential-election year and the service applications from Norwegian’s subsidiaries represent political hot potatoes in the US Congress.

However, America’s (and Europe’s) largest airlines have much to fear if the EC takes unilateral action, as it soon will have the right to do. Under the EU-US air service agreement, the EC can declare the three big antitrust-immunised transatlantic joint ventures no longer exempt from antitrust scrutiny and can even have them dissolved if its findings indicate they have become anti-competitive.

Then the North Atlantic scheduled-service market, the busiest transoceanic market in the world, would truly become competitive. No longer would three US airlines and their European partners control more than 80 per cent of North Atlantic scheduled passenger traffic.

But in such an event, surely, it would become very difficult for the top ten US mainline passenger carriers to make $12bn in pre-tax profits in any six-month period.

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