US airline industry books highest margins in 15 years

28 January 2016

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.

System long-term operating margin trend

Positive margins
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%.

Proportion of costs

Carrier costs
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.

Fuel costs 2000 - 2015

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.

Change in domestic unit costs

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.


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BDO administrates Flybmi amid aviation industry turbulence

21 February 2019

Around 400 jobs in the UK, Germany, Sweden and Belgium have been lost following the collapse of commercial airliner Flybmi. The administration, which will be overseen by professionals from BDO, constitutes the third failure of a commercial carrier since the start of 2019, with the industry having suffered from sustained turbulence for the duration of last year.

The initial 4 a.m. announcement informing customers that Britain’s longest-surviving airline, Monarch, had been placed into administration meant that many passengers arrived at airports only to find their flights cancelled and holiday plans inconvenienced, while many were left with no means of returning to the UK. Beyond the immediate ramifications, however, the collapse of Monarch also drew to a close six years of steady improvement for commercial carriers across the world. 

Since the economic shock of 2011 – an echo of the 2008 financial crisis – the number of commercial airlines falling into administration across the world declined at a relatively consistent rate. According to data from – barring an anomaly of a year which saw only four airlines falter in 2014 – the number of collapses in the sector declined continuously. In 2017, the figure stood at just 10, compared to a huge 46 in 2011, and a  staggering 61 in 2008.

Global number of airlines to have failed since 2005

Following Monarch’s precipitous fall, however, the situation once more seems to have commenced a nose-dive in the following year. 15 airlines failed in 2018, and less than two months into 2019, another three have followed suit. That puts 2019 on pace to reach 24 airline collapses. 

The latest of these firms to spiral into administration is Flybmi, an East Midlands-based airline which until February operated 17 regional jet aircraft on routes to 25 European cities. The company operated more than 600 flights a week from regional airports including Bristol, Newcastle, Aberdeen and the East Midlands.

News of the firm’s demise emerged as it cancelled hundreds of flights at short notice over the space of a single weekend, leaving many passengers stranded and out of pocket. Flybmi advised customers to seek refunds from credit and debit card companies, or to rebook with other airlines, before eventually appointing administrators from professional services firm BDO.

The appointment, initially reported by UK paper The Telegraph, came following a weekend of chaos, with passengers and staff desperate for information, but without an administrator to turn to, as authorities had remained tight-lipped on the matter. The process was reportedly delayed until the following Monday by a Scottish law which prevents insolvency specialists being appointed over the weekend.

Turbulence ahead

Commenting on the task at hand, BDO Business Restructuring Partner and joint administrator Tony Nygate said, “As joint administrators, we are taking all necessary steps to ensure customers, staff and suppliers are supported through the administration process. Our job is to maximise recoveries and minimise distress for all parties, acting as smoothly and swiftly as possible.”

Administrators from the firm now face questions over what preparations were in place prior to the carrier’s collapse, including actions that could have softened the blow for thousands of stranded passengers. Meanwhile, some 376 employees in the UK, Germany, Sweden and Belgium have been made redundant, with the remainder staying to assist with the administration. Unions have since demanded urgent talks with Flybmi’s administrators, with Unite, which represents about 40 of the airline’s 376 staff, calling for a buyer to be found in order to ensure wages are paid in full.

Unite Regional Secretary Paresh Patel told the press, “Unite is shocked and saddened by the news that Flybmi has gone into administration…  This is a terrible blow for the airline’s workforce and their families, as well as the East Midlands economy. We will be giving maximum support to our members who work for the airline across the UK at this very difficult time for them.”

The Brexit process seems to have played a key role in the downfall of Flybmi. Airlines are required by law to purchase carbon credits to offset their carbon emissions – something which until recently was subsidised through a free allocation of credits by European authorities. Now, however, Brussels has excluded UK firms from their allocation of credits ahead of the UK’s divorce from the EU in March, and it is anticipated that this may  well lead to more casualties in both the airline industry, and the broader British economy.

Glen Flannery, a Partner at law firm CMS, told The Telegraph, “The European Commission has started to implement its No Deal Brexit contingency plans. With effect from January 1st, it has temporarily suspended the UK’s free allocation of carbon allowances, auctioning, and the exchange of international credits. This has created a huge amount of uncertainty for UK participants, the full effects of which have yet to play out.”