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Domestic Airlines Surge, but Future Remains Cloudy

Aug. 4, 2015
The four major U.S. airlines enjoyed a 30% spike in profits during the second quarter, but the Department of Justice is investigating some anti-competitive behavior after ticket prices remained high amid dropping fuel costs.

NEW YORK — Major American airlines are facing a boon thanks to lower fuel prices and enjoying record profits, but doubts remain as to whether the industry can reach long-term profitable levels.

American Airlines, United Airlines, Delta Air Lines and Southwest Airlines — the four top U.S. carriers — have seen their profits spike by some 30% in the second quarter. American and United even recorded their largest quarterly profits ever, $1.7 billion and $1.2 billion, respectively.

But behind the surge in earnings is an array of challenges that analysts say might be difficult to balance: a strong dollar, excess capacity on international routes and a war of budget pricing causing a downward trend on the market indicator of revenue per passenger per mile.

“Low oil prices translate into higher profits for big airlines,” analyst William Bias said. Crude prices have fallen by more than 50% compared to a year ago, and Delta, for example, was able to drop its fuel bill by 40%.

The savings have delighted the markets, excited by the prospect of rising dividends and new share buyback programs. Analysts now project that American Airlines, United and Delta will appreciate by about a third after having long been shunned by investors.

“2015 and 2016 will likely be peak years for the U.S. airline industry,” Standard & Poor’s financial services company said in a note, “and changes in either the relatively favorable economic conditions or low fuel prices could pressure the company’s earnings at some point in the future.”

The industry has gained, but not everyone has been pleased. 

The Department of Justice is investigating some airlines over anti-competitive behavior after ticket prices appeared to stay high despite a drop in fuel prices.

Seat prices were up 2% last year despite plummeting crude cost, Department of Transportation statistics show. Large carriers have also increased capacity despite some analysts calling for a reduction in flights so they can raise rates.

Market firm Trefis says top airlines have no choice: they have to increase domestic flights to defend their market share from smaller aggressive competition such as JetBlue, Alaska Airlines and Spirit Airlines.

Profitability also is relative. Profit indicator PRASM (passenger revenue per available seat mile) dropped 6.5% in June, according to Airlines for America, the U.S. airlines lobby. PRASM fell 5.5% domestically and 9.5% on international routes. Delta and United have already warned their PRASM numbers would fall as well.

“International pricing remains under pressure as a consequence of lower international fuel surcharges along weak demand,” according to Deutsche Bank Research, which added that weak currencies relative to the dollar and oversupply in overseas markets are also to blame.

By Luc Olinga

Copyright Agence France-Presse, 2015

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