There seems to be no stopping the US airline industry. Passenger traffic has set new highs throughout the past year and there are few signs of the growth slowing down. Profits have been spectacular.
On almost any measure, the year-end results from the US majors are the best in airline history. Admittedly, some of the shine was taken off the net-profit figures by another series of special charges, notably Delta's massive $745 million provision. Also, Trans World Airlines (TWA), which had less to celebrate than most in 1996, has yet to report. The underlying figures, however, remain impressive, especially for an industry which managed to notch up some $10 billion of losses during the black days of the early 1990s.
Operating profits have been even more impressive with United, American and Delta all managing to beat $1 billion. Stripping out restructuring charges and the various costs of employee ownership and profit-sharing plans, leaves the industry with an underlying profit margin of better than 10%.
The question now is whether the performance can continue. On the evidence of the past few months, passenger demand looks like holding up, with traffic growing by nearly 8%in the fourth quarter and remaining buoyant in January.
It is true that the 1996 figures reflect the boost given to the industry in the first half of the year by the lapsing of the federal ticket tax, which helped carriers to keep down fares and stimulate demand, without sacrificing profits. Yet figures for the second half suggest that the re-imposition of the tax in mid-year did less damage than many in the industry had feared. It is still possible that the airlines will receive a similar boost early in 1997, given that the tax lapsed again at the start of this year, although it is too early to predict how long - if at all - the situation will be allowed to last.
There are also continuing concerns over fuel costs, following the massive rise in oil prices around the middle of 1996. Most of the US majors were hit by a price rise of around 20% in the price of aviation fuel over the year, rising from an average of around 55 cents per gallon during 1995 up towards ó70 in 1996. Continental, which had wisely hedged against such a rise, was the notable exception, managing to keep the rise down to around half that hitting its competitors.
Overall, the fuel bill of the major US carriers grew by close to $2 billion over the whole of 1996, although that includes the impact of increased flying. In the fourth quarter alone, the fuel bill soared by 30%. Delta estimates that the price hike helped turn a 1%decline in unit costs over the quarter into a 2.5%increase. American also estimates that its hefty 6%rise in fourth-quarter costs would have been held to 2.6%if fuel prices had remained constant.
There are signs from the oil markets that aviation-fuel prices may begin to ease later this year, which could begin to bring down headline unit costs, just as they artificially inflated them in 1996.
More ominous are the rumblings of discontent among airline labour unions, no doubt encouraged by the industry's record profits to take a tougher line on wage negotiations. American's pilots set the scene with threats to bring the airline to a halt for a month or two from mid-February. American's managers have warned of "disaster" for the carrier, the airline industry in general and a cost of $5 billion to the USeconomy. The most dire estimates suggest a cost to American of $40 million a day.
Even if such a catastrophic industrial action is avoided, there is the danger of a less dramatic, but more persistent pressure, on labour costs. If that can be resisted, US carriers should enjoy the boom for at least another year or two.o
Source: Flight International
