After losing some altitude in the middle of the year, U.S. airlines cruised to a stronger finish in the second half of 2016 with signs that a years-long revenue slide could be coming to an end.
Delta and United airlines kicked off the airline earnings season last week when they reported fourth-quarter profit of $622 million and $397 million, respectively.
North Texas’ Southwest and American airlines are next, with Southwest scheduled to report its earnings Thursday morning and American on Friday.
Southwest’s fourth-quarter profit is estimated at $452.7 million by a consensus of Bloomberg analysts. American’s is forecast at $392.7 million by a consensus of Bloomberg analysts.
Those profits will be lower than the previous year, especially at American, which reported a record $3.3 billion in profits during the fourth quarter of 2015, fueled by a large one-time tax credit.
Still, there are signs that times could be better for airlines this year after an up-and-down 2016. Airline stocks fell 23 percent through the first half of the year before climbing 45 percent over the last six months, according to Bloomberg’s U.S. airline industry index.
That improvement has coincided with stronger demand from business travel, especially in the last two months of the year, giving airlines hope that a two-year slide in a key revenue metric will finally stabilize.
After several years of rapid expansion powered by low fuel prices, airlines have been taking steps to slow the growth of their networks in an attempt to bring the supply of seats more in line with demand.
“The United and Delta [earnings] calls make me believe that the rate of [revenue] decline has definitely slowed and is getting close to zero. The question becomes how much capacity gets added in 2017,” said George Ferguson, senior airlines analyst with Bloomberg Intelligence.
Legacy carriers like American and United also are launching new types of fares that could bring in hundreds of millions of dollars of new revenue over the next year.
In February, American will launch its no-frills basic economy fare, which offers the lowest prices at the cost of amenities like carry-on bags. The carrier also is rolling out a premium economy fare that offers larger seats to those willing to pay a bit more.
American looks to be in a strong position on the revenue front, telling investors in a January update that it expects its fourth-quarter revenue per available seat mile to be flat to up 2 percent compared with the previous year. Seat miles are a closely-watched metric that measures the amount earned for each seat flown a mile,
Southwest is projecting a 3 percent to 4 percent decline in the same metric compared with the fourth quarter of 2015.
Airlines will need stronger revenue performance in 2017 as they deal with rising fuel and labor costs.
Fuel prices were at a low at the start of 2016, but steadily increased over the course of the year, a trend that’s expected to continue in 2017. In the company’s earnings call, Delta’s chief financial officer projected the carrier’s fuel price would be up 30 percent at the start of 2017 compared with the first quarter of 2016.
Southwest will have to account for the large raises given to its flight attendants and pilots as part of new contracts that the groups approved in October and November.
American didn’t strike any major new collective bargaining agreements in 2016, but did give raises to several employee groups and implemented a new company-wide profit-sharing program.
“Those two headwinds really create an obstacle for the airlines to get over to improve profitability,” Ferguson said. “Against headwinds of higher costs they’re going to need to find a way to get fares to rise from here.” http://www.dallasnews.com/