The profits that U.S. airlines garnered this summer despite a double-digit rise in jet fuel costs are a testament to the industry’s changes since a price surge more than a decade ago threatened the survival of some of its biggest players.
New technology is allowing carriers to more quickly cancel or redirect unprofitable routes and scale seating capacity appropriately. Updated aircraft provide more fuel efficiency, while growing opportunities for cargo shipments due to the rise in e-commerce are providing new revenue streams. And cabins are increasingly more segmented, making it easier to manage the profitability of each flight.
“Technology is enabling the airlines to take that framework that used to exist a decade ago and further optimize,” Harsha Majeti, general manager at travel technology firm Sabre Corp., told the Washington Examiner. Carriers can up-sell added services such as meals, checked-baggage and seats with expanded legroom, he noted.
The result is a drastically different business from that of the early years of the 21st century, when climbing prices spurred bankruptcies at American, United, US Airways, Delta and smaller rivals.
That’s particularly important after President Trump’s withdrawal from the Iran nuclear accord curbed jet fuel supplies, pushing prices 36 percent higher at the end of October than a year ago. Some companies are already faring better than others.
American, the world’s biggest carrier, saw profit plunge 48 percent in the three months through September. Its stock price is at one of the lowest levels in the past five years.
Meanwhile, profit at United soared 30 percent in the third quarter to $836 million. Passenger revenue per available seat mile — a key metric of airline success — grew 6.1 percent, significant for a carrier of its size, experts say.
Even some budget airlines — which theoretically would be more affected by higher fuel costs because margins are tighter — are showing resilience. Net income at Spirit Airlines rose 62 percent to $97 million for the quarter despite a nearly equal rise in fuel costs.
“They are going into this environment with much stronger balance sheets and cash flow than they did 10 years ago, which directly speaks to the importance of shoring up your finances when times are good to prepare for a recessionary environment,” John Heimlich, vice president and chief economist at lobbying group Airlines for America, said in a recent interview.
Underscoring the growth is the reality that managing higher fuel costs has become an easier task for airlines.
Using more advanced optimization algorithms, carriers are able to more quickly pinpoint unprofitable routes. Greater segmentation in passenger cabins helps, too.
The traditional model for airlines was to have three cabins — coach, business class and first class. Today, larger carriers have created a basic economy section — cheaper seating that comes without benefits like seat selection — and premium economy, which offers extra legroom and amenities for a higher price.
That adds new metrics for companies to consider when determining whether to fly a specific route, according to Stan Boyer, vice president for customer solutions at Sabre Corp.
By tailoring charges to seats, which could mean higher prices for those next to windows or with more legroom, airlines can “start to revenue manage the individual seats just like they’ve been revenue-managing the entire flight,” he said in a recent interview. “We’re seeing that among the more sophisticated carriers today.”
And it’s paying off. Premium ticket sales are on the rise at several major airlines. At Delta, they rose 19 percent to $3.6 billion.
Revenue per available seat mile, a gauge of airline profitability, grew in United’s premium seats at 3.7 times the rate of coach. The carrier also increased fee revenue per passenger by 10 percent due to an increased demand for “Economy Plus,” which has larger seats and more legroom.
Airlines have also been quick to exercise their new flexibility on flight schedules.
American cut service from Chicago to both Shanghai and Beijing, routes the vice president of network planning called “colossal loss makers.” Delta ended flights between the U.S. and Hong Kong but plans to restart direct service from Seattle to Osaka, Japan, and to add a Minneapolis-Shanghai route in 2020, the first of its kind.
United is adding what it says is the only direct flight offering from both Chicago to Leon, Mexico, and San Francisco to Pape’ete, the capital of Tahiti. It is also adding 22 new routes in 2019 from six hubs across the U.S.
“If a route is not profitable or they don’t have a roadmap to achieve profitability in the near-term, they are quicker to reallocate that capacity,” Brian Rynott, managing director at Alton Aviation Consultancy, said in a recent interview.
United, for example, announced in October it would begin flying the wide-body 787-10 Dreamliner from Newark to Los Angeles and San Francisco. “Historically for United, its been a narrow-body premium product on the” narrow-body Boeing 757, Rynott said.
