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Quarterly Profits: Have Airlines Been Caught in Quicksand?

Quarterly Profits: Have Airlines Been Caught in Quicksand?

Just about a two years ago in 2015, many airlines were reporting record profits. For instance, the four major US carriers, namely American Airlines, Delta Airlines, United Airlines and Southwest Airlines reported at least over a billion dollars in net earnings. Many observers and analysts cited better market conditions, marked by lower oil prices, capacity discipline following some mega mergers and strong demand for air travel as the plausible justification for such unprecedented financial performance.

Indeed at the time, fuel was about half the price compared to the preceding peak noted in 2012. Planes were full thanks indeed to strong passenger demand and let’s not forget overbooking. Capacity restraint was the watchword for an industry, which finally appeared to have found the right combination to the proverbial vault of airline profitability.

At the same time pressure mounted from labor organizations to conclude long and tedious contract negotiations, which were already underway at some of the airlines for several months.  The fairly recent mergers gave others the critical mass to cover a wider network and capture a larger market share.

Now less than 24 months later, as airlines were reporting their first quarter of 2017 results, one cannot help but notice a downward spiral. Apparently, without any exceptions, one airline after another has announced much lower profits compared to the same period the previous year. If it were slight drops of the magnitude of 5% or even 10%, it might be easily understandable. This is just not the case. The nose-diving profits in some cases represent nearly 70% less compared to the first quarter of 2016. This goes without mentioning some reported losses. Even Southwest Airlines, the long standing profitable airline, saw its first quarter net earnings drop by close to 32%.

The only consolation so far is that most of these airlines are still reporting some profits. Now, what is our main concern here? It is the fact that one can clearly see how fuel costs are actually the main driver behind airline profitability. This is certainly not the first time you may have read something of this nature in Airline Profits magazine. But, the point is though that operational efficiency was also cited as one of the main contributors to the records profits of US airlines over the last couple of years. So the question is: what happened to that operational efficiency?

Besides, things are probably getting trickier for US airlines. On one hand, airfares have significantly dropped, following much pressure from all sides to give passengers a break on the account of record profits amidst lower oil prices. On the other hand, labor costs have increased due to pressure from labor unions to ensure that airline employees get a share of that record profits as well and that is fair game.

Plainly speaking, you have lower fares leading to lower unit revenues, whereas you have higher fuel and labor and in some instances maintenance costs resulting in higher operational unit costs. The result is undoubtedly lower profits. Now, with oil price rising again as we have anticipated it would at some point, the parting question is: have airlines been caught in quicksand?

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Kofi Sonokpon

Kofi Sonokpon

Managing Editor of Airline Profits, the first aviation magazine devoted to improving airline effectiveness and profitability, Kofi Sonokpon has more than 20 years of international experience in aviation. Kofi holds an IATA sponsored Master of Business Administration (MBA) in Air Transport Management from the John Molson School of Business at Concordia University in Montreal. Kofi Sonokpon is a speaker, an airline business thought-leader, and author an innovative book series intended for the 21st century airline, namely Airlines for Business and Airlines for Technology.