US airlines facing fuel and people pressure

US commercial airline profits has been bumpy in recent years. Low fuel prices contributed to a recent peak, but with fuel costs climbing again, profitability is expected to slide in 2019.

The US airline industry has faced considerable headwinds in recent years, including high fuel costs midway through the decade; sharp competition from and among discount carriers; and increasing staff costs. A sharp contraction in the price of fuel saw a period of breathing room for the industry, while years of cost-cutting in the face of high fuel prices returned further dividends. Meanwhile, lower ticket prices drove increased uptake in air travel.

While the years since 2015 have seen fuel prices remain relatively low, current conditions are causing increased concern from companies – which, according to new analysis, is being reflected in profits. A new report from Oliver Wyman, titled ‘Airline Economic Analysis’, looks at the numbers.

2018 saw margins of around 8%, down from a 15% peak noted in 2015. The lower margins are still relatively strong compared to the post-crisis years, when margins of 6% or lower were the norm for the industry. However, the industry continues to contend with overcapacity – which grew considerably faster than US GDP – which has resulted in some negative drag on industry performance.

Overall revenue growth across the three networks was relatively strong over the past year-to-date covered by the report (Q3 2017 to Q3 2018). Ultra-low cost carriers (ULCC) were the top performer, with total revenue growth of 18.9%, buoyed in particular by the international segment (42.7%). Value and Network carriers, meanwhile, saw their revenues increase by 10.3% and 6.2% respectively – while revenue growth from domestic and international travel was more balanced.

For Network carriers, capacity contributed to around 50% of total growth, followed by value (30%) and fee growth (20%). Smaller carriers remain highly dependent on fees revenue – reflecting considerable differences between carriers when it comes to revenue streams. For instance, Hawaiian revenue from fees comes in at 7.2%, compared to the other end of the range, Spirit, whose revenue from fees stood at 48% in 2018.

Cost

While revenue was noted for relatively strong growth and margins continue to be relatively positive, the cost picture reflects wider difficulties faced by the industry, with higher fuel prices and labor costs dampening results. The former in particular saw strong increases between Q3 2017 and Q3 2018 – up 35.4% for ULCC, 26% for Value and 30.5% for Network. Overall, around a quarter to a third of total costs for the three types stems from fuel. Labor costs were highest for Value and Network as a percentage of their total costs, and relatively low for ULCCs.

Though fuel costs have increased markedly in recent years, the recent spike and continued geopolitical uncertainty is likely to see margins in the industry fall to around 6% for 2019. The trend around fuel price remains uncertain: risks to global growth could decrease demand, while increased utilisation and geopolitics could put upward pressure on prices.