For a fiscal quarter that kicked off with the federal budget sequestration — and consequently quite a few cancelled business travel plans — things looked shaky for U.S. airlines. However, airline companies avoided a stall, and some even managed to soar.
Delta Air Lines (DAL), United Continental (UAL), and Southwest (LUV) all turned in strong earnings, though most were saddled with special charges that hurt earnings. Meanwhile, US Airways (LCC) beat estimates, and American’s (AAMRQ) cost-cutting efforts helped the company post a gain for the quarter.
It was another solid quarter for airlines stocks, which have soared throughout 2013. The big question for investors is whether the stocks can hold that altitude. Here are four things that we learned about airlines from their earnings reports:
Cheap fuel is helping airlines soar: It’s not surprising that airline stocks are setting new highs when you consider oil prices. Jet fuel accounts for as much as 40% of an airline’s operating costs, so the recent slump in oil prices — as well as the narrowing “crack spread” (the difference between oil prices and the per gallon price of jet petrol) — have been great news for carriers. But investors should be mindful that fuel price volatility is a fact of life, and a small swing one way or the other can have a big effect on airline margins.
Never underestimate the power of ancillary revenue: Airline ticket sales are not the only ticket to profitability for airlines. Ancillary revenue (fees associated with everything from baggage to priority boarding to inflight sales) accounted for $27.1 billion in airline revenue last year, according to a report by IdeaWorks. Expect this trend to accelerate in the coming years, driven by advanced inflight entertainment options like Wi-Fi.
Travel demand is holding steady: On Thursday, the International Air Transport Association said air travel demand continues to improve, noting that September’s global passenger traffic rose by 5.5% year-over-year. In North America, however, airlines grew capacity — the number of available seats — faster than passenger demand increased. That’s an important metric to watch because airlines have been able to boost profitability by improving load factor — an airline term that simply means fewer empty seats.
American-US Airways merger outcome is a wild card: One of the biggest wild cards right now is the fate of the planned merger between US Air and American Airlines, which is being challenged by the Justice Department under antitrust law. While the DOJ says that strong American and US Air earnings are proof that the airlines don’t need the economies of scale a merger would bring, the carriers are lining up more support for the deal practically every day. A growing chorus of House Democrats has urged the Obama administration to drop the suit, boosting the outlook for a deal before the antitrust trial is set to start Nov. 25. However this plays out, it will have a profound impact on airline competition, particularly in high-value East Coast hubs like Washington, D.C.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.
