subject: Domestic Airlines in the US: Quarterly Earnings Report [print this page] Domestic Airlines in the US: Quarterly Earnings Report
By IBISWorld Senior Analyst Nima Samadi
Industry Overview
The Domestic Airlines industry was flying high until 2008, but skyrocketing oil prices, the US economic recession, the global economic downturn in 2009 and the swine flu outbreak adversely affected the industry. As a result, IBISWorld estimates that revenue shrank 5.3% per year between 2008 and 2010.
In 2011, a spike in oil prices once again threatens the industry; the Air Transport Association (ATA) estimates that for every dollar increase in the price of jet fuel, the US airlines industry incurs an additional $445.0 million in fuel expenses. However, the industry is expected to return to profitability over the next two years, and additional fees and charges will be the main method that airlines use to offset weak demand and oil price volatility.
The price of fuel is a significant determinant of operating costs and can influence profitability. Many airlines cannot pass on the full cost increase to their customers and profit is often compromised, increasing the industry's risk in the coming year. Overall, the Domestic Airlines industry is forecast to be 6.2 (on a risk scale of one to nine), or highly risky, over 2011. Therefore, companies will extensively implement hedging strategies as another profit protection tool.
By the end of 2012, profit is anticipated to reach about 8.5% of industry revenue, but it will fall back to 3.2% losses by the end of 2014. Earnings growth will rely on the stabilization of oil prices and return of demand to the business and private traveler segments.
Major Industry Players
Southwest Airlines (LUV): Industry Winner
As other airlines continue to raise rates to combat rising fuel costs, discount carriers such as Southwest have fought against industry-wide increases. The company's growth comes from sustained low fares and high volume (it is the largest domestic airline by number of passengers enplaned and scheduled domestic departures, according to the Bureau of Transportation Statistics). These factors have made Southwest the most successful low-cost carrier in the country, with continued profitability in the past 30 years. Additionally, the operator has long-standing fuel hedging contracts. When combined with its low fares and emphasis on customer service, the company comes out as the big winner over the coming quarter and the current fiscal year.
US Airways (LCC): Industry Winner
US Airways has successfully renewed its focus on increasing customer satisfaction. Its satisfaction scores have risen consistently over the past few years and, in the 2011 Airline Quality Ratings, the company notched up to sixth from eighth overall compared with the prior year. IBISWorld expects these factors to drive the company through the next fiscal quarter and over the year, allowing US Airways to outperform its competition. However, while the majority of its business comes from domestic flights, US Airways has felt the impact of the earthquake and tsunami in Japan. According to US Airways President Scott Kirby, advance bookings were up 2% to 3% prior to the events of March 11. However, in the immediate aftermath, bookings fell 20%. What makes US Airways' example so unusual is that the airline does not fly to Japan or anywhere else in Asia. US Airways now plans to reduce fourth quarter 2011 capacity by as much as 2%. The carrier may want to make further cuts as well, though union labor agreements limit the extent to which flight numbers can be reduced. Despite these factors, the company will still outperform the competition.
American Airlines (AMR): Industry Loser
American Airlines was the only major player in the Domestic Airlines industry to not post a profit in fiscal 2010, ending the year with a net loss of nearly half a billion dollars. The combination of rising fuel prices and potentially stagnant travel demand could drive net losses to more than $1 billion in 2011. To combat rising fuel prices, American Airlines increased domestic fares by $10 per round trip, which could trigger the seventh fare increase this year by US airlines. Another potential risk for the airline is a strike by flight attendants, though that seems increasingly unlikely as of late. Rising fuel prices and potentially stagnant travel...click here to read the FREE full report on airline earnings.
