Airlines Reporting Record Profits

What's Next for the Airline Industry?

Airlines Reporting Record Profits
February 2, 2016

It is a great time to be one of the major airlines. The major carriers have been reporting a string of record profits, just as predicted by the International Air Transport Association earlier this year. Back in July, IATA revised its outlook for the industry to predict $29.3 billion in net worldwide profits for airlines, well beyond the $16.4 billion in industry profits in 2014.

IATA's estimate may actually fall short given the third quarter results from some of the airlines. Southwest Airlines (NYSE: LUV) posted a record profit of $584 million on $5.32 billion in revenue, a significant increase over the $324 million profit on $4.8 billion in revenue in the third quarter of 2014. American Airlines (NASDAQ: AAL) posted their 8th consecutive record quarterly profit with $942 million on a record $11.1 billion in revenues. United (NYSE: UAL) had total revenue of $10.3 billion, a year-over-year decrease but still reported expected pre-tax margins of between 9.5%-11.5%.

All airlines are benefitting from the enormous drop in fuel costs, since fuel costs are one of the biggest airline expenses and one that carriers can do little about aside from negotiating longer-term deals. The nature of locked-in pricing delayed airlines' ability to take advantage of lower fuel prices, but with oil prices remaining unusually low, airlines are now enjoying the benefits of lower fuel costs and likely will do so for some time. Fuel savings for the major airlines are running in the billions of dollars — Southwest predicts $1.3 billion in savings this year and other carriers have seen savings as high as $1 billion per quarter.

Fuel price windfalls are being directed at airlines' bottom lines instead of toward customers through reduced fares. That is for one simple reason — because airlines can. Demand is high enough that airlines do not have to slash prices to keep up their passenger share. In some local markets, intense competition is introducing price pressures — for example, the battles in American Airline's biggest hub market of Dallas has resulted in a decrease in passenger revenue per available seat-mile (PRASM) — but in general, demand is solid.

According to the airlines, a majority of the savings are being reinvested in operations through buying new airplanes and establishing new routes, as well as upgrading facilities throughout the world. It makes sense to apply the current windfall toward upgrades, but shareholders are benefitting as well. American Airlines have been incrementally adding to a share buyback program that totals $6 billion for the year to date.

When one of your main expenses is down for a prolonged period and demand is high enough to keep revenues strong, you should expect great profits, if not record ones. But how long can the party last?

Within the U.S. market, it seems likely to last a while longer. The average net profit per passenger is $18.12 in North America, compared to the world average of $8.27, $6.30 in Europe, and $4.24 in the Asia Pacific region. Average inflation-adjusted airfares are among the highest in over a decade. Oil prices are still well below 2014 values. Meanwhile, individual airlines are finding other bits of positive news. For example, Southwest expects a 1% increase in income over the next few months due to a new series of international routes.

Expect the airlines to continue to take advantage of this environment as long as possible, because they know that at some point, fuel prices will rise and the party will be over. The smart airlines will invest wisely while they can.

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Brittany | 02.02.16 @ 15:57
That's good that more people are traveling/flying. I just recently bought a plane ticket for my sister to come visit.
Carla | 02.02.16 @ 15:58
Maybe the fares will start to come down now that profits are up.
irene | 02.02.16 @ 15:58
We haven't flown in a while but we might next summer
Erin | 02.02.16 @ 15:58
And yet they continue to nickel and dime you everywhere they can. How about passing some of that profit back to the consumers?
Steffanie | 02.02.16 @ 15:59
Hopefully they will share those profits by lower ticket prices. They seem to still be high.
Alec | 02.02.16 @ 15:59
With all the other fees airlines tack on, you'd think instead of making a larger profit, they'd reduce the prices of tickets. But as it says, since the demand is high, they don't have to. Airplane ticket costs are ridiculous. Hopefully the hyperloop system is up and running within the next few years, even if it's limited!
Kailie | 02.02.16 @ 15:59
I think this is great, especially since for a few years there, profits weren't very high and a lot of cuts were being made because of it.
Sarah | 02.02.16 @ 16:00
Yay... they're making more money off those who gotta fly places. Well hopefully they do something good with it and don't gouge the fliers once it changes again.
Nancy | 02.02.16 @ 16:00
With all the fees and lower fuel prices I'm not surprised. They pass costs down to the consumer but rarely savings.
Kamie | 02.02.16 @ 16:00
It is nice to see that the fear people were in has finally subsided, and that profits are coming back to the airports. Hopefully they take advantage of everything being cheap so then for a while the prices can also stay low for those who want to travel to new places.
Heather | 02.02.16 @ 16:01
We always fly and fly Southwest. Their prices are pretty reasonable. But some of the other airlines are crazy expensive. I wouldn't be able to fly if they were my only option. No wonder why their profits are up.
$commenter.renderDisplayableName() | 11.25.20 @ 02:58