What 2019 Taught Us About the U.S. Airline Industry

For U.S. airlines, the fourth earnings season is now complete. And as is customary these days, all players produced solid profits. Collectively, Delta, American, United, Southwest, Alaska, JetBlue, Hawaiian, Spirit, and Allegiant reached a double-digit operating margin, topping 10 percent on nearly $46 billion in revenues. For all of 2019, they earned 11 percent on $184 billion. The year before: 10 percent on $175 billion. No other country has an airline industry so stable and profitable.

What were the highlights of the final quarter of the final year of the decade? Here’s a review:

Boosted by Economy

Perhaps most importantly for U.S. airlines, the domestic economy was strong, driving robust corporate and household spending on air travel. U.S. gross domestic product grew a healthy 2.1 percent in the fourth quarter and 2.3 percent for all of 2019. Though business spending was weak, consumer spending and especially government spending was up significantly. Both fiscal and monetary policy remain expansionary.

Less Capacity

Complementing strong demand conditions were tight supply conditions. Seat capacity, indeed, was depressed by the absence of grounded Boeing 737 Maxs, and to a lesser extent the late arrivals of Airbus A321 NEOs. To be clear, the carriers affected wish it weren’t so — disrupted fleet plans are driving up costs, complicating operations, and delaying strategic initiatives. But there’s no denying the significant lift to industry unit revenues from the loss of so much capacity.

Fuel Prices Drop

Fuel prices dropped sharply. This was another big highlight of the fourth quarter: The industry’s fuel bill sank 8 percent year-over-year despite a 3 percent increase in seat capacity, not to mention the unrealized fuel efficiency that all those grounded Maxs and tardy NEOs were supposed to provide. Most carriers paid just a bit more than $2.00 per gallon, compared to a simple average of about $2.30 in the same quarter a year ago. This quarter by the way (January to March) looks even better. After an initial jump following escalation of U.S.-Iran tensions, Brent crude oil prices have plummeted, reacting to the virus-related demand shock in China.

Cost of Labor Goes Up

Labor costs, on the other hand, are not falling sharply. On the contrary, the sector’s fourth-quarter wage and salary bill jumped 7 percent year-over-year. Some of that is profit sharing. But most is simply linked to higher pay rates and better benefits. There’s likely more labor inflation to come as the three largest U.S. carriers (American, Delta, and United) negotiate new pilot contracts now already past their amendment dates. Pilot contracts at Alaska, Southwest, and Sun Country will become amendable later this year. American will have to swallow the cost of its new mechanics contract, if ratified. Hawaiian can’t seem to get a contract done with flight attendants. And so on.

Airport Costs Rising

Airport costs are rising too. It’s not a huge part of an airline’s cost base, certainly not as meaningful as labor or fuel costs. But several carriers felt it important enough to mention in the fourth-quarter earnings calls. U.S. airports are often cited as examples of America’s neglect when it comes to infrastructure investment. In reality, the country’s top 50 airports have budgeted about $35 billion in capital spending. Big projects include an all-new airport in Salt Lake City (right alongside the old airport), a revamp of New York LaGuardia airport, and big projects at Chicago O’Hare and Los Angeles International. Denver, Dallas/Ft. Worth, Charlotte, N.C., and Washington Reagan National are others expanding with additional gates. Delta alone is investing $12 billion of its own money over the next five years to upgrade its hub airports.

Aircraft Investments Pay Off

Efficiencies from aircraft investments are delayed but not denied. U.S. airlines aren’t getting their planes on time — their narrow-body planes anyway. But the NEOs, Embraer E-Jets, and Boeing 787s that are arriving do wonders for unit costs. Delta is keeping Airbus happy by taking A220s, A330 NEOs, A350-900s, and, later this year, A321 NEOs. These aircraft have revenue benefits too, providing greater range, more space for premium seating, and more comfortable interiors than the jets they’re replacing. At current count, five U.S. airlines have ordered standard-range NEOs, four have ordered Maxs, three have ordered B787s, and two have ordered A220s. United, American, and Frontier have ordered extra long-range (XLR) versions of the NEO. None, however, has ordered Boeing’s B777-X. Several are interested in Boeing’s new mid-market aircraft (NMA) wide-body concept. Sometimes, it’s not about buying new planes but what you do with your old planes. United is creatively refashioning aging CRJs and B767s with more premium seats.

The Problem With Asia

While domestic conditions were extremely strong, international market trends were more mixed. The big weak spot for U.S. carriers last quarter was Asia, but even that had areas of ups and downs. Japan was fine. But mainland China and Hong Kong were not. Same for cargo on Asian routes, a big contributor to overall cargo revenues. The story was more unambiguously uplifting in Latin America, where carriers saw big unit revenue gains from the key Mexican and Brazilian markets, mostly thanks to capacity cuts (Mexican markets were affected by Aeromexico’s MAX constraints).

Across the Atlantic, where the three largest U.S. airlines earn most of their international revenue, yields and unit revenues declined year-over-year, hurt by adverse forex trends and some pockets of weakness, notably outbound corporate demand from Germany. But transatlantic conditions remain broadly benign. One would think that non-U.S. airlines are scrambling to add U.S. capacity to take advantage of the good economy. But foreign airline capacity to the U.S. was down in fourth quarter, partly owing to the loss of carriers like Wow Air, Primera, Thomas Cook, and Avianca Brasil. At least as important was Aeromexico’s MAX disruption and downsizing by Norwegian, Avianca, Hong Kong Airlines, Icelandair, and Air China.

Revenue Generators in Overdrive

Encouragingly for the future, carriers continue to possess a large arsenal of revenue-enhancing weapons. The most important of these is their loyalty plans. Also ranking high are joint ventures, many still yet to transpire. There’s smarter segmentation and pricing. There’s micro-targeted upselling and other forms of personalization enabled by data mining, machine learning, and IATA New Distribution Capabilities principles. As already mentioned above, new planes and new airport facilities can drive revenue growth too.

One Surprising Hot Market

San Juan, Puerto Rico heads a list of hot markets. That might seem surprising given the island’s struggling economy and lingering effects from hurricane Maria. But sure enough, tourism is back, and San Juan’s scheduled seat capacity grew a stunning 23 percent year-over-year last quarter (according to data from Cirium), benefitting from Frontier’s decision to double its presence there. Sprit, Delta, American, Southwest, and Sun Country all added lots of seats too. So did some of the island’s biggest international carriers like Copa, Iberia, and Avianca. Among America’s 50 busiest airports, the growth leaders following San Juan were Nashville, Fort Myers, Dallas DFW, San Jose, Austin, and Denver. All are among the country’s fastest-growing areas economically.

Seat Capacity Declines

Eight of the top 50 U.S. airports saw annual seat capacity decline. Kansas City led the way with an 7 percent drop. Icelandair withdrew service. But more importantly, Southwest shifted capacity elsewhere during its Max crunch. The other Q4 losers, most of them likewise Southwest-heavy, were Chicago Midway, Orange County, Calif., New York Kennedy, Houston Hobby, Los Angeles International, Miami, and San Francisco.

Biggest Battleground Markets

Hawaii highlights of a group of battleground markets. It’s Hawaiian versus newcomer Southwest in the Aloha state, with Alaska and the Big Three also in the ring. At Newark, Southwest is not entering but leaving, opening the door to Frontier and other low-cost carriers itching to rattle United. Delta is challenging American in Miami while American challenges Delta in Boston. The two are also going to war in South America. Delta is already challenging JetBlue in Boston and Alaska in Seattle. There’s the aforementioned Puerto Rico fracas. Various airlines are jockeying for supremacy in hot markets like Nashville and Austin. Booming Denver is a three-way battle involving United, Southwest, and Frontier. Sarasota,Fla., and Asheville, N.C. are two smaller airports with huge capacity increases. Tokyo could get bloody as Delta, American, United and Hawaiian expand at Haneda airport. JetBlue is preparing to challenge the three largest U.S. carriers in  joint ventures in the transatlantic market next year. We’ll soon find out where David Neeleman’s new airline Breeze will make its moves.

Flight Shaming

Carriers increasingly acknowledging the environmental threat: It’s a more pronounced phenomenon in Europe, but pressure on airlines to address their carbon footprint is a reality in the U.S. now too. Not standing still, JetBlue announced a major initiative to fly carbon neutral on all domestic flights. Frontier is trumpeting its environmental credentials through its marketing, including one campaign that offered free flights to anyone with the last name “Green.” All U.S. carriers, though, are now speaking loudly and often about the topic.

What’s Ahead in 2020

And looking ahead? The recent fuel price collapse should be a big booster this quarter. Demand still looks good, aside from isolated trouble in greater China. Maxs aren’t likely coming back until at least the fall. In 2016, carriers did report some demand slowdown around the presidential election, the next one of which occurs this November. The most disruptive event of 2020 could prove the entrance of Breeze, though it’s not poised to launch until late in the year.

A version of this story was first published in the Feb. 10 edition of Skift Airline Weekly.