Insights

Strong Air Passenger Demand Kept Pace in Third Quarter

April 4, 2017

Strong air travel demand and an improving economy kept domestic airlines buoyant in the quarter ended September 30. With third-quarter gross domestic product growth at a respectable 2.9 percent, unemployment at 4.9 percent and news that household income expanded a record 5.2 percent in 2015, more Americans than ever before can afford airfare, which is at its lowest cost in seven years, according to Airlines for America (A4A).

Headwinds during the period included heightened global terrorist concerns and geopolitical instability in some parts of the world. In the U.S., the strong dollar continued to be a challenge. What’s more, airlines may have already seen the extent of the savings delivered by low fuel costs.

Higher fuel costs, in fact, could actually help airlines at this point, according to Hunter Keay, Managing Director of Airlines, Aerospace & Defense at Wolfe Research. Keay points out that when oil has risen in the past, airlines have responded by tightening capacity discipline, which is far more attractive to investors than earnings and profits.

“Multiples drive about 70 percent of the movement in stock prices,” Keay says. “Multiples are dictated by the perception of pricing power, and pricing power is dictated by capacity control.” Higher oil prices create that dynamic.

Despite the headwinds, passenger traffic on a global scale grew nearly 7 percent year-over-year in September, its fastest pace in seven months, according to the International Air Transport Association (IATA). At 11.5 percent, the Middle East improved the most.

Load factor, which measures the use of aircraft capacity, climbed to an all-time September high in most major markets, the exception being Australia. Globally, the industry hit 81.1 percent capacity.

In July, the most recent month of data from the U.S. Department of Transportation, the domestic load factor fell to 83.4 percent after three straight months of growth, from April to June. The decline was attributable to a small 0.2 percent decrease in revenue passenger miles (RPMs), combined with a slight 0.1 percent increase in system capacity, as measured by available seat miles (ASMs).

In the first nine months of 2016, the top nine U.S. airlines—Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit and United—reported combined net income of $18.3 billion, a decrease from the $18.7 billion pocketed during the same period in 2015. The pre-tax profit margin fell to 15.5 percent, down slightly from 15.6 last year.

Airline Investors Pocketed $11.4 Billion in Rewards

Domestic airlines are committed to fixing their balance sheets, retaining and attracting new investors and improving conditions for both workers and passengers. So far this year, airlines have reinvested an average of $1.4 billion per month to update or replace aircraft and to enrich the customer experience. Cash flow generated since the industry consolidated in 2009-2010 has allowed carriers to retire a combined $60 billion in debt, which today accounts for just 32 percent of operating revenue, down from 45 percent in 2010.

According to A4A, carriers returned $11.4 billion to shareholders in the first nine months of 2016—$10.5 billion in stock buybacks and $912 million in dividends.

For the first time since 2008, U.S. airline jobs have exceeded 400,000 and are on their way to reach the all-time high of 520,600 jobs set in 2000. American Airlines leads the group with 98,000 employees.

Around the corner is the busy Thanksgiving period (November 18 – 29), which A4A predicts will see a record 27.3 million people flying on domestic carriers, up 55,000 passengers per day from 2015 volumes.

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