Airlines Are Making More Money — and You’re About to Be a Whole Lot Happier
The airlines are making money — but what does it mean for you? (Photo: Adam Fagen/Flickr)
The four largest U.S. airlines have just posted strong second quarter profits, but whether they will share the wealth with business travelers remains to be seen.
Industry experts say that although the gains will help carriers continue investing in state-of-the-art aircraft — a plus, particularly for travelers whose employers allow them to fly in the front of the cabin — carriers will continue to impose so-called ancillary fees. So you can continue to expect to be charged for the things that helped put them in the black: preboarding, seat assignments, and extra legroom. But it also might mean perks like in-seat power options and better in-flight entertainment systems.
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It remains to be seen how much of the airline-industry profits will be passed on to travelers. (Photo: Getty Images)
In the second quarter of calendar year 2014, American posted its highest ever quarterly profit, $864 million, compared to a profit in the same period last year of $220 million. Delta’s profit rose 17 percent in the quarter to $801 million. Southwest’s record second-quarter net profit was $465 million, compared with $224 million in the same quarter in 2013. And United’s profit of $789 million was 68 percent higher than the $469 million posted in the same period last year. These four carriers generate 90 percent of the U.S. airline industry’s profit.
According to Michael Derchin, airline analyst for CRT Capital Research, carriers’ strong profits are the result of several factors, including cheap jet fuel, which he said cost less in the second quarter than it had since 2010; jet fuel is the industry’s largest cost element, making up approximately 55 percent of direct operating costs.
Higher airfares — Derchin said fares climbed four to five percent in the quarter, year over year — also contributed to profitability, as did income from ancillary fees. He said these fees, which totaled only $2 billion for the industry in 2006, had climbed to $7 billion last year, all “going to the bottom line.”
Although Derchin said airlines will plow their profits into new aircraft, this will not necessarily be a boon to business travelers. He estimates that although U.S. carriers have 850 new aircraft currently on order for delivery through 2019, the vast majority will be used to replace older planes airlines will retire. He expects only 150 new planes will be added to the industry’s total fleet. “Load factors will stay very high” — which means planes will stay crowded — “fares will go up and fees will go up. The airlines will do it because they can do it,” he said.
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A new plane gets its finishing touches (Photo: Getty Images)
Tim Winship, publisher of FrequentFlier.com, a Web site devoted to travel loyalty programs, expects airlines will make “all their major investments in business and first-class products, maybe a little on premium economy. If you’re all the way in the back of the plane or in discounted coach, there’s really no good news for you in the most recent financial performance.”
The good news, he added, will be for “the more privileged segment of the business travel pie.”
According to Henry Harteveldt, travel analyst for Atmosphere Research, “every business decision airlines make now is not safety-related, but filtered through the lens of profitability. Airlines will evolve their products and services with an eye on travelers who will pay more. These tend to be business travelers.”
One outcome of this focus, he said, is that larger corporations may be able to negotiate more perks for their employees when they travel.
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How about a better seat next time you travel (Photo: Jetstar Airways/Flickr)
Another possibility, he said, could be airlines giving business travelers buying full-coach or unrestricted fares more privileges and amenities, such as greater access to better seats and boarding privileges, cheaper upgrades to seating with extra legroom, etc.
Harteveldt expects one outcome of carriers’ increased investment in aircraft that could benefit all passengers will be more in-seat power options and better in-flight entertainment systems, such as streaming video. However, he does not expect carriers will invest in more generous legroom in standard coach or free meals in standard economy on domestic flights.
Winship predicts corporations will keep closer tabs on their business travelers’ airline ticket purchases next year, when Delta and United change the way their frequent flier programs operate and base rewards on price of tickets purchased, not miles flown, thus “encouraging people to spend more to earn more.”
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You might have to up your spending for frequent flyer points (Photo: Robert S. Donovan/Flickr)
“There are probably already conversations taking place between companies and corporate road warriors about keeping travel costs in line,” he said.
Winship expects American will adopt United and Delta’s new loyalty program policy, based on dollars spent rather than miles flown, when it integrates its program with that of USAirways — which it merged with in 2013 — next year.
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Southwest, Jet Blue, and Virgin America’s loyalty programs currently are expenditure-based.
“The best news is that when the airline industry is profitable it tends to be more stable. There will hopefully be fewer knee-jerk reactions, so if fuel costs go up, airlines won’t look for ways to slash the number of front-line employees. They may be financially able to maintain employment and less likely to do lay-offs,” Harteveldt said.
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