Airlines eye retiring older aircraft if fuel costs continue to rise
Pre-tax earnings for US airlines fell 27%"”down approximately $700 million year-over-year"”in the first quarter of 2018, as fuel, labor, airport and aircraft expenses outpaced revenues, according to an industry overview by Airlines for America (A4A) released May 23.
The US airline industry, of which A4A represents nine publicly traded mainline US passenger carriers (Alaska Airlines, Allegiant Air, American Airlines, Delta Air Lines, Hawaiian Airlines, JetBlue Airways, Southwest Airlines, Spirit Airlines and United Airlines), earned $1.9 billion in pre-tax profits combined for the 2018 first quarter, compared to $2.6 billion in 1Q 2017.
"We don"™t see this letting up any time soon given the rapid ascent of fuel prices, [and with] crude oil prices rising swiftly at their highest level in three-and-a-half years," A4A chief economist John Heimlich said. "Brent crude prices in May were averaging about 50% more than May 2017 and have risen recently to about 60% more year-over-year (YOY), a situation that could persist at least through the summer."
"The challenge is that operating expenses have been rising faster than operating revenues, [with] a 9.9% increase in operating expenses led by a 23.3% increase in fuel, [and a] 6.8% increase in labor," Heimlich said. "Combined, that resulted in a reduction in [YOY] profits to just under a nickel for every dollar of revenue collected, a 4.9% margin." Operating revenues increased 7% YOY during the quarter.
The combined pre-tax 4.9% profit margin placed the US airline industry well below the US corporate average of 15-16%, Heimlich said. In A4A"™s ranking, based on SEC filings, the combined nine US airline"™ 4.9% profit margin for the quarter was about half of Marriott"™s (10%) and one sixth of the US rail sector (30.1%), but ahead of Ford Motor Co. (4.6%).
Looking to the summer ahead, A4A forecasts a 3.7% YOY increase to 246 million total passengers flying on US airlines between June 1 and August 31, about 2.7 million passengers per day, up 96,000 passengers per day compared to summer 2017. US airlines are planning to add 116,000 additional seats per day to meet demand, which A4A said is driven by expanding LCCs, low-fare options on full-service carriers and city-pair competition, combined with rising GDP, employment, and disposable income in the US…