Cheaper fuel has airlines soaring to record profits
DALLAS — For airlines, the record profits keep coming, thanks to cheaper jet fuel.
Like motorists, airlines have been saving money at the pump since oil prices began plunging last summer. Even with a recent increase, the spot price of jet fuel is down 40 percent since September. Airlines are getting such a price break that profits are surging even though their revenue is flat or declining.
At American Airlines, passengers flew fewer miles and revenue declined 2 percent in the first quarter. But thanks to a $1.36 billion cut in its fuel bill, American reported today that it earned a first-quarter record $932 million.
The other three U.S. airline giants reported similar results in recent days:
— United Airlines posted record first-quarter earnings of $508 million, even though revenue dipped 1 percent; it saved more than $1 billion on fuel.
— Delta more than tripled its net income to $746 million after spending $600 million less on fuel.
— Southwest tripled its profit to a record $453 million; fuel savings were $437 million.
Those are stunning results when you consider that the first quarter is usually the weakest of the year for airlines. From 2000 through 2013, the nation’s airlines lost money in the first quarter every year but one, according to government figures.
One reason is that the big airlines have held on to most of their savings from cheaper fuel. They haven’t shared the bounty with passengers through lower fares because travel demand has remained steady and most planes are nearly full at current ticket prices.
The average domestic round-trip ticket sold so far is $454 including taxes, a savings of just $2 from last summer despite the huge drop in fuel prices, according to the Airlines Reporting Corp., which processes ticket transactions for airlines and travel agencies.
Now the airlines are heading into their best season, summer. United, Southwest and Alaska Airlines all said they plan to increase passenger-carrying capacity — that usually means adding more flights or using bigger planes — to take advantage of summer demand.
The airlines could be challenged to keep boosting their profits later this year, when their results will be compared with the low fuel prices of late 2014.
American’s president, Scott Kirby, said the airline must increase revenue for every seat it flies one mile, a figure known in the industry by the acronym RASM.
“We will have to get to a world where RASM is growing, and I hope that will be the case,” Kirby said on a conference call with analysts and reporters. “There are all kinds of things we do to try to manage the business ... and try to increase revenues.”
The per-mile figure cited by Kirby fell 2 percent in the first quarter at American, and the company predicted it will drop even more sharply — between 4 percent and 6 percent — in the second quarter. United gave the identical forecast on Thursday, while Delta Air Lines Inc. said last week that the per-mile revenue would decline by 2 percent to 4 percent.
U.S. airlines hope to reverse that slide by cutting back on plans to expand flying later this year, especially on international routes, where their profits are suffering because of the strong U.S. dollar and weaker travel in oil-producing countries. Reducing capacity tends to lead to higher fares and fewer empty seats — the simple math of supply and demand.
J.P. Morgan analyst Jamie Baker said the second quarter was likely to mark the weakest period for the revenue figure.
The airlines have some other built-in advantages that might also help them increase revenue. Between the U.S. and Europe and on other key international routes, U.S. airlines work with foreign partners to set fares — a practice made possible because the U.S. government granted them immunity from antitrust laws.
“The airlines see significant benefit from that. For the consumer, the jury is out,” said Bob Mann, a consultant and former American Airlines executive. He said airlines also have become more skilled at getting the most revenue from every flight by matching supply and demand, even down to the time of day, day of week, and season of the year of each flight.
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