Seat 2B By Joe Brancatelli
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Airlines Have Billions of Reasons to Be Happy
May 12, 2016 -- J.D. Power, the pop-culture rating agency, claimed on Wednesday that passenger satisfaction with the nation's airlines has reached a ten-year high. Your mileage will almost certainly vary, but let me tell you something you aren't likely to know.
The airlines are ecstatic with how things are going. Thrilled. Laughing-all-the-way-to-the-bank happy.
Whether you like them more than ever, as J.D. Power claims, or continue to hate them with a white-hot passion bordering on obsession, the nation's passenger airlines are rolling in the deep dough. Profits have skyrocketed, costs are down, planes are full and there are no pesky start-ups around to harsh their financial buzz.
This isn't a guess on my part, you understand. I know the airlines are irrationally exuberant because government statistics compiled about their 2015 operations reveal an industry racking up record-shattering profits. The numbers are literally unprecedented.
Let the profits flow
Airlines made no secret that they desired to serially merge in the last few years as a way to thin out the supply of seats and drive up prices. Guess what? It worked fabulously. The 25 airlines that operate scheduled service in the United States have recorded after-tax net profit for the past six consecutive years, the longest string of profitability since the dawn of deregulation in 1978.
Moreover, profits are growing exponentially. The group recorded an after-tax net profit of $25.6 billion in 2015, up from $7.5 billion in 2014. And the profits were no accounting trick, either. The carriers reported a $28 billion pre-tax operating profit, about double the 2014 take.
The airlines also have relentlessly focused on margin. The industry's combined net income margin in 2015 was 15.2, more than triple its 4.4 percent performance in 2014. The airlines' operating profit margin was 16.6 percent last year, almost double its 8.6 percent margin in 2014.
The perfect 10
There may be 25 scheduled airlines by government standards, but that number is misleading. The top 10 U.S. airlines represent a carefully arranged oligarchy now. Those 10 carried 81.9 percent of the nation's traffic and accounted for 94.6 percent of the industry's after-tax net profit. That means they racked up $24.2 billion in net profit in 2015 compared to $7.3 billion in 2014.
Who are these behemoths? In 2015, the combined American and US Airways led the pack. American is followed by Delta and United. Those three carry the DNA of almost all of the airlines that existed at the dawn of deregulation. Besides US Airways, built out of a merger with Piedmont Airlines and PSA, American also includes what was TWA, Ozark and Air Cal. Delta Air Lines, which bought up Western Airlines 30 years ago, merged a decade ago with Northwest, which had previously merged or bought out a raft of carriers. United Airlines has never quite recovered from its merger with Continental Airlines and those two carriers were created out of deregulation-era carriers such as Eastern, Pan Am and the original Frontier.
The other carriers in the top ten? Number four Southwest Airlines was a regional anomaly at the time of deregulation. Number five JetBlue Airways, founded in 2000, is the newbie in the group. Alaska Airlines is another regional anomaly. It has survived and prospered by staying independent although it is about to swallow Virgin America. Hawaiian Airlines (number seven) is the long-time incumbent in the Aloha State. Spirit and Frontier, the low-cost/high-fare carriers, are number eight and 10. Number nine SkyWest flies as a commuter carrier for American, United, Delta and Alaska.
Fees are not our friend
As airlines merged themselves into an oligarchy, they also dramatically shifted their revenue streams. No longer is our fare dollar the only income source. In fact, fares represented just 75 percent of the industry's $168.9 billion of operating revenue in 2015. The other 25 percent came from "optional" fees.
Two passenger-specific fees — checked-bag charges and reservation-change penalties — now represent an eyebrow-raising 4.1 percent of the industry's revenue. Even more surprising? The $3 billion that airlines raised last year from "allowing" us to change our tickets is nearly as much as they raked in from baggage fees ($3.8 billion).
The exception to this blizzard of fees? Southwest Airlines allows you to check two bags free of charge and doesn't impose ticket-change fees. As a result, 93 percent of its revenue comes from fare dollars. At the other end of the scale, United, American and Delta each derive just 70 percent of their revenue from fares.
Fueling the profits
When oil surged past $100 a barrel in 2008, it represented as much as 40 percent of the airline industry's costs and was quickly driving carriers out of business. Now that oil is much more reasonably priced, the cost mix at the airlines has changed dramatically.
In 2015, fuel at the nation's carriers represented just 19.2 percent of operating costs. And as it has been for much of the deregulated era, labor costs are once again the most notable expenditure. In 2015, labor costs accounted for 32.2 percent of the industry's total expenses.
The reversal of fortune in those two cost lines is stunning. In 2011, the U.S. carriers spent a collective $43.7 billion on fuel. It was just $25.9 billion last year. Labor, on the other hand, has risen from $35.3 billion in 2011 to $45.3 billion last year.
It may surprise you, but Southwest Airlines has the industry's highest labor costs. In fact, it accounts for more than 42 percent of all its expenses. In contrast, Spirit and Frontier spend the least on labor and it accounts for about 23 percent of their costs.
Any of that make you feel better of the airlines? I didn't think so. Tell it to J.D. Power ...