The US airline industry has, for the first time in almost 15 years, seen margins above 10%. The increase in operating margins flows primarily from decreases in fuel cost, which tumbled almost 40% between Q2 2014 and Q2 2015 and still remains low today. Decreases in other costs, particularly maintenance and airplane ownership, too have helped see sunnier skies for the industry.
Oliver Wyman’s recent report on the US commercial airline industry, titled ‘Airline Economic Analysis 2015-2016’, divides US airlines into two broad groups: network carriers and value carriers. In its analysis, the consulting firm explores and compares the two groups with respect to a range of indicators, from operating margins to cost profiles.
The US airline industry has been buffeted by considerable headwinds in recent years. The traumatic period following 9/11, high fuel prices (prior to the recent fall), and increased competition have resulted in 1.3% operating loss produced by US network and value carriers, with network carriers bearing the brunt of those loses.
This has been changing however, and over the past year, both network and value carriers have passed the 15% margin mark for the first time since 2002. The mid-2014 upswing has sent margins trended upwards, peaking for value operators at 19.7% during the second quarter of 2015. Meanwhile, network carriers returned to modest profitability during the last half of 2013 and also peaked in Q2 2015 at 15.2%.
In terms of unit costs, the drop in the fuel price has seen fuel as a proportion of total costs fall significantly; down from 30.2% to 26.2% for network carriers and down from 34.7% to 25.3% for value carriers. Labour is now the most significant cost for airliners, accounting for 32.9% of the network carrier system wide unit cost and 34.5% of value carrier cost.
Both groups have also benefited from a decline in all other unit costs, which now represents 24.1% of network carrier cost and 23.1% of value carrier unit cost. Network carriers have reported lower passenger food cost, commissions and landing fees, while value carriers have been experiencing lower landing fees and non-aircraft rentals.
The major factor in the reduction of costs is the large scale reduction in fuel prices. A large portion of airliner’s structural costs comes from fuel costs. These costs have been relatively stable over recent years – increasing to just over $3 a gallon in 2011, where it stayed until mid-way through 2014. Today, however, US airlines pay $1.83 per gallon of jet fuel, 37.8% below what they paid just 12 months prior.
Relative to historical standards, the price of fuel remains relatively high compared to the period between 2000 and 2003 when it stood well below $1. The considerable uncertainty regarding the volatility of the price is affecting the market, and according to the consultancy, the effect of continued low fuel prices would be relatively dramatic for the industry. Operating margins could rise as high as 22.2% if fuel costs fell to $1.68 or go as low as 5.0% if the price of fuel again exceeds $3.00 a gallon.
While fuel costs have decrease, the total cost profile is more complex. The analysis shows that labour costs for US value carriers is on the increase – up 5.1% over the past year, while aircraft ownership costs have increased 1.1%. The value carrier sector, however, saw considerable gains in aircraft maintenance and ‘other’, providing a total cost reduction of around 11.7%. Network operators saw their labour costs decrease slightly (1.2%), while aircraft ownership and maintenance decreased 5.4% and 8% respectively. For network operators the total costs came down 13%.
According Oliver Wyman, the lower fuel prices are the main reason for the improved margins, but other costs have also dropped, such as aircraft ownership and maintenance costs, allowing overall unit costs to drop faster than unit revenue.