US carriers have been on the crest of a wave in recent years as a mix of restructuring, consolidation and low fuel costs have driven a run of record results, contributing to more than half the global industry profits.
But 2016 has proved to be a tougher year, as airlines battled and largely failed to turn around falling unit revenues. While the continued benefits of a restructured market and low fuel costs mean profits remain at industry-leading levels, carriers face more work to turn the corner on yields.
US airlines began the year with the view that capacity growth would abate enough for yields to stabilise and unit revenues would begin to recover from their declines in 2015.
Things did not turn out as planned. Airlines slowed capacity growth slightly in 2016, with FlightGlobal schedules data showing an increase of 4.85% compared with 5.12% in 2015. But that is still more than double the US Federal Reserve’s economic growth forecast of roughly 1.8%, a measure widely used as a proxy for air travel demand growth in mature markets.
Airlines also reported weak close-in bookings, despite overall robust levels of demand through the first half of the year.
These factors – coupled with world oil prices remaining low – have contributed to the continued poor unit revenue performance at all US carriers to date in 2016, with the exception of Hawaiian Airlines.
Airline executives acknowledged early in the year that capacity additions were pressuring yields, but did little initially to reign in the growth. Southwest Airlines chief executive Gary Kelly, in response to analyst questions in July, said the airline could not "model a scenario where it's profit-positive” to reduce planned capacity growth through to the end of 2016.
"We've been leading the industry consistently with our unit revenue performances – I think it has very much justified our growth," he said.
While passenger revenue per available seat mile (PRASM) did fall at Southwest over the first three quarters of the year, those drops were mostly smaller than those at other airlines. Unit revenues at the low-cost carrier decreased 3.6% in the first quarter, 3.5% in the second quarter and 5% in the third quarter – with the third quarter fall exceeding the decline at some other airlines due to one-time charges related to a computer outage in July.
Delta also waited until May to begin disciplining its capacity plans, when it shaved a percentage point off of its guidance for the fourth quarter. It has since announced that it will grow by just 1% in 2017 – a point off its annual target of roughly 2% system-wide growth.
“[The] challenge we face is from continued unit revenue declines that have persisted for the past seven quarters,” said Ed Bastian, chief executive of the SkyTeam carrier, in October. “Capacity is a significant lever we can use to impact [unit revenue] performance.”
However, many of the reductions at Delta will be in international markets, where the carrier faces additional pressures including long-haul low-cost carrier incursions and foreign exchange and terrorism-related impacts.
Both American and United had trimmed up to a percentage point off their 2016 capacity plans by July, acknowledging the need for discipline to return to positive unit revenue territory. But the majority of the reductions were in international markets, where the mainline carriers are seeing the most competitive pressure.
“Getting back to positive PRASM is now about a balanced supply [and] demand environment,” said Scott Kirby, president of United, in October.
US carriers have begun to see demand improvements with the implementation of their mid-year capacity actions. In October, executives at American, Delta, JetBlue, Southwest and United all noted sequential monthly improvements, especially in close-in bookings, beginning around September.
The trend continued to improve in November. In a report on 1 December, UBS revised up its fourth quarter PRASM expectations by 25bps to a roughly 4% industry-wide decrease compared with its previous analysis of bookings the week before.
The bank expects domestic unit revenues to decrease by roughly 3.5% during the period.
Domestic pricing is also on an upward trajectory. JP Morgan counts roughly 10 fare increases that have succeeded to date this year, compared with just one in all of 2015.
Airlines expect the combination of additional capacity discipline and improved yields to drive a return to flat or positive domestic passenger unit revenue performance soon. Delta says domestic PRASM could hit an inflection point in December, while Southwest and other discounters expect a turnaround in early 2017.
While they anticipate flat to positive domestic PRASM sometime in the near term, American and United anticipate that international pressure will continue to weigh on their system numbers well into 2017.
All indications suggest that US carriers will continue their capacity discipline into 2017. FlightGlobal schedules data shows domestic capacity is scheduled to increase by just 2.6% in the first quarter – 3.7 percentage points slower than the year before.
This article was first published on Flight Dashboard on 8 December
Source: Cirium Dashboard
