Airlines Make Profit!
The airline industry turned a record profit for the 2nd quarter. Don't expect it to last.
Among the “overlooked” stories covered by The Blaze on its first day in action is “Airlines Return to Profits,” a story which otherwise would only have been seen by those with access to the Associated Press wire.
The International Air Transport Association says 47 major carriers it monitors to assess the industry’s financial health reported a net profit of $3.9 billion in the second quarter.
The results contrast with the $881 million net loss posted by carriers a year earlier.
IATA says airlines in North America and the Asia-Pacific region performed best.
The Geneva-based association says European carriers’ results were boosted by a $1.3 billion asset sale in the second quarter, without which they would have posted further losses.
IATA said Monday that airlines benefited from stable fuel prices and slowly improving demand over the past months.
The path to the recent profitability has been the steady destruction of carriers, whether through bankruptcy or merger, and the paring of flight schedules to ensure that most planes are packed to the brim. By getting supply nearly to the level of demand, the airlines can charge enough to actually make money on most flights.
Additionally, the carriers have over time leveraged the decaying state of their business to get pilot and maintenance crew salaries down to sustainable levels.
Don’t expect this to last. We’ve had commercial aviation for nearly a century now and nobody has managed to make a sustained go of it yet. As the business starts to look profitable, we’ll inevitably see more entrants into the competition, driving down price, and demands from labor for their fair share, driving up costs.
One of my wife’s favorite stock commentators used to say, “If the stock market is open, it’s a good day to sell airlines.” I suspect you are correct in your assessment.
Steve
Revisions in accounting rules in the treatment of leases virtually guarantee that the financial picture for commercial airlines in the coming years will look very bleak, indeed. Even though it’s only a difference on paper it’s a difference on paper that reflects the actual prospects for the business more realistically than the old rules.
Fuel has risen and could likely wipe out any profits for the 3rd Q. The fuel issue brings up the underlying drag energy costs have on the economy. Until energy costs decline, motor fuels essentially, we will continue to see anemic growth. As it is any sign of recovery is met with jumps in oil price and an instant check on optimism. Our economy must have cheaper oil to recover as we have historically. The fact we have no realistic energy policy to ensure such cheap energy is just another proof of governments failure.
I’m not about to put my nest egg into the airline industry but I think you’re being overly pessimistic Jim. Airlines like many industries (autos, construction equipment, hotels) are very cyclical. Like the auto industry it had over capacity and a business model that was too dependant on unprofitable volume and overloaded with costs. And generally speaking carriers haven’t been “destroyed,” (ie. cease to exist) they’ve been consolidated into other airlines, their routes and capacity largely preserved, which is a very common phenomenon in mature industries as they gravitate to an oligopolistic model. Taking the long view I think the prospects for the industry are good provided they keep their costs under control (which is always going to be a challenge) and fuel costs don’t go through the roof. The volume of airline traffic is forecast to continue increasing and the barriers to entry are formidable. Sure they have their problems but if you want to take a century as your yardstick most industries have been through booms and busts just as bad as the airlines.
OK. Don’t you think this statement deserves a bit more elaboration?
“Don’t expect this to last. We’ve had commercial aviation for nearly a century now and nobody has managed to make a sustained go of it yet.”
Commercial Aviation lasts a century, but no one has made a sustained go of it yet? If what you mean is that no airline seems to last more than four or five decades, it may be more indicative of the difficulties of any business that requires a huge capital infrastructure and an incredibly complex bureaucracy to run. When new innovation starts to steal their business it is incredibly difficult for such companies to change quickly enough. It’s not that they are dinosaurs, it’s just innately difficult to move from one type of capital to another, or one incredibly complex infrastructure to another.
Dave Schuler says:
Tuesday, August 31, 2010 at 10:21
“Revisions in accounting rules in the treatment of leases virtually guarantee that the financial picture for commercial airlines in the coming years will look very bleak, indeed.”
Which changes would these be? The requirement that leases can no longer be treated as off balance sheet?
Yes.
Aside from some of the low budget, limited route carriers, I don’t think anybody has made a profit for more than a very few years at a time. The industry sustains itself because people keep betting they can do better.
Southwest has made a profit every year for the last ten years (at least). How long do you want?
I think you’re attacking the wrong target, James. The hub model has collapsed and commercial airlines using that model have had difficulties ever since deregulation.
Dave Schuler says:
Tuesday, August 31, 2010 at 11:22
“Yes.”
I may be out of date but I didn’t think the rule change had been approved yet in the US let alone the rest of the world. And the financial bleakness will be more apparent than real. Sure ratios like ROI are going to suffer (although even that will depend on exactly how the leases are treated and I’m sure that will be subject of much debate!) but it’s not as if the airlines weren’t already meeting the costs of these leases. It’s not going to have a huge impact on the basic business model or the P & L I would have thought. It may call into question the existence of the jet leasing business.
“The industry sustains itself because people keep betting they can do better.”
With due respect Jim, utter bollocks. The bulk of the major national and international carriers today were in business thirty years ago, they’ve just absorbed smaller and weaker rivals. Sure there have been some new entrants like JetBlue who have made it but most have failed.
Some things to ponder:
Southwest has been profitable in all but one of its 43 years of operation, and has posted a profit for the past 37 years.
American Airlines has been in business 80 years
United traces its roots even farther back, but has operated with that name for 79 years.
Delta – 82 years.
USAir – as Allegheny (I remember “Agony Airlines”) then USAir, then US Airways for 47 years.
It’s a tough business to make a profit in. Like the restaurant business you need a huge capital investment and have tons of recurring costs that don’t change even if no one shows up. But like the restaurant business, when you make money, you really make money.
But these guys did not stay open a half century or more because there was always a “greater fool” out there doesn’t really hold up.
MarkedMan, I think the question is how have United, American, Delta, and so on fared since deregulation? For much of their seventy or eighty years they ran with more or less guaranteed profits. As to Southwest, that’s much the same question as I asked James above.
That’s almost certainly true. Southwest seems to be making it, as is JetBlue. Although even most of the budget carriers seem to last a very short time.
A lot of those are “brands” rather than businesses. That is, the carrier went belly up but someone bought out the name and the planes.
“But like the restaurant business, when you make money, you really make money.”
These guys were making oodles of money about eight years ago and for periods in the 90’s.
“A lot of those are “brands” rather than businesses. That is, the carrier went belly up but someone bought out the name and the planes. ”
Jim the stronger airlines who have been in business forever swallowed the weaker ones. They weren’t “brands” anymore than a host of other companies in Pharma, telecomm, construction equipment, Metals, computers, automobiles, etc etc were just brands. Their very real assets were absorbed by their acquirers and swelled the overall size of his business. As I pointed out you earlier but you rather conspicuously ignored these businesses weren’t destroyed, their assets remained in being. Or is this how they teach economics at the University of Alabama.
Jim, do you really think KLM, Austrian Airlines and Iberia are just “brands.” Lufthansa and BA doesn’t give a damn about their names (or only marginally) they want their passengers, routes, gates, planes, real estate, and infrastructure.
Oops missed Air France of my list of “acquirers”, they took over KLM about five years ago.
“I think the question is how have United, American, Delta, and so on fared since deregulation? ”
Carter deregulated the airlines 32 years ago and since then there have been periods of high airline profitability and serious losses. And it’s not as if airlines weren’t a highly cyclical business with casualties before deregulation. It not regulation, but as Marked Man says the nature of the business itself which has huge fixed costs and equally huge and fairly inelastic operating costs. When the market cools you’re left holding the baby and unless you have a strong balance sheet or access to capital you’re not going to be able to hang in there until the next upturn in market fortunes.
While it wasn’t explicitly stated in the post, I’m talking about domestic carriers, not nationalized overseas carriers which operate under a completely different paradigm.
“While it wasn’t explicitly stated in the post, I’m talking about domestic carriers, not nationalized overseas carriers which operate under a completely different paradigm.”
Jim in fact it was explicitly stated in the post which was all about a report from IATA. And international carriers do not operate under a totally different paradigm. The economics of major airline operations are essentially the same. Not that it makes a dimes worth of difference when the same acquisition principle is applied domestically. Most of the remaining major national carriers (several of whom have substantial international operations btw) have all made consolidatory acquisitions over the years. Delta didn’t acquire Northwest for its name but it’s passengers, routes, gates, planes, real estate and infrastructure. In fact you could argue that the brand was even less important to Delta where national sensibilities weren ‘t involved as they would be with someone like KLM or Iberia. Im sorry Jim, but you’re totally barking up the wrong tree here.
Between 1989 and 2006 the domestic airline industry ran a profit for just seven of the years. The profits it made during the fat years didn’t make up for the losses they sustained over the lean ones.
Is it possible that the domestic airline industry could start making consistent profits? Sure. The hub business model requires too much overhead. They’d probably need to restructure their contracts. Is it likely that they will? Beats me. Somebody with more direct knowledge of the airline industry might have a more informed opinion.
” ran a profit for just seven of the years. ”
This may be true but it ignores the fact that certain major players like American who pioneered the now probably obsolete hub and spoke system to my certain knowledge made tons of money in the 80’s and 90’s. Also Southwest although I’m less familiar with their performance. American’s growth was by no means all organic (I can’t remember wheher it was TWA or PanAm they acquired some time in the 90’s). I’d say the steel industries record of boom and bust is just as parlous but it’s still there because like the airline industry it serves a basic need. It’s a question of being quick enough on your feet to adjust to changing circumstances and having a strong balance sheet which is where Southwest is probably the star.
Southwest is good disproof of your thesis, Brummagem Joe. It continues to show a profit despite the business cycle. That’s the reason behind my claim. If Southwest can show a profit when other airlines are racking up losses, the problem isn’t that the airline business is a cyclical one but that other airlines have a lousy business model that makes them too vulnerable to cyclic downturns.
Dave Schuler says:
Tuesday, August 31, 2010 at 16:13
“Southwest is good disproof of your thesis,……If Southwest can show a profit when other airlines are racking up losses, the problem isn’t that the airline business is a cyclical one but that other airlines have a lousy business model that makes them too vulnerable to cyclic downturns..”
DUH? How is it a disproof of my thesis that the airline business is intensely cyclical just because one of it’s major players has a better business model than others that enables it to cope better with periodic downturns. During these down cycles even Southwest makes less money. You’ll be telling me next the auto industry is not cyclical just because BMW or Nissan’s profitability was less impacted than GM’s or Ford’s. Or to move back to the airline industry, American was making money in the 90’s when Pan Am and TWA were going down the tubes.
Dave Schuler says:
Tuesday, August 31, 2010 at 16:13
In fact Dave, if you think about it Southwest is actually conclusive proof of the accuracy of my thesis that despite the handicap of high fixed and operating costs in an industry that is notoriously cyclical, the airline business is not inherently unprofitable as Jim was suggesting. As I said above:
“It’s a question of being quick enough on your feet to adjust to changing circumstances and having a strong balance sheet which is where Southwest is probably the star.”
I interpreted you as saying that the cyclical quality was dispositive. Clearly, not.
“I interpreted you as saying that the cyclical quality was dispositive. ”
I take it by dispositive you mean decisive. Well it can be and it’s certainly a major factor in the airline industry which has high fixed and operating costs which don’t go away if the passengers do. Obviously with any business you’re striving for a model that is recession resistant and if I’m making widgets I can always shut the factory down for six months. Airlines don’t have that option. Interestingly as I recall the time Southwest actually lost money a couple of years ago it wasn’t because of operational or volume issues but because they screwed up some hedge trade on fuel.