NEW YORK CITY: Major US 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 US carriers—have seen their profits spike by some 30 percent in the second quarter.
American Airlines 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 may 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,” said analyst William Bias from 247WallSt.com.
Crude prices have fallen by more than 50 percent compared to a year ago.
Delta, for example, was able to drop its fuel bill by 40 percent.
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 around a third after having long been shunned by investors.
“2015 and 2016 will likely be peak years for the US airline industry, 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,” Standard & Poor’s financial services company said in a note.
Investigations and profits
The industry has gained, but not everyone has been pleased.
The US Justice Department 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 two percent 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 percent in June, according to Airlines for America, the US airlines lobby.
PRASM fell 5.5 percent domestically and 9.5 percent 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,” said Deutsche Bank Research, adding that weak currencies relative to the dollar and oversupply in overseas markets are also to blame.