I had written a comment in a post a little while back noting that the stocks of several US airlines have been fantastic investments recently (US Airways, Spirit and Allegiant, specifically – full disclosure, I own shares in US Airways and Spirit). Those airlines have long been operational powerhouses, banging out profits quarter after quarter, even as their larger cousins have been all over the place.
But since the US Airways/American merger it’s beginning to appear that the US airline industry is, quite possibly, in the best shape it’s been in since deregulation (the pre-deregulation years were a completely different business for airlines, and it’s almost not worth looking at data from those days. But after nearly 30 years of turmoil, the industry is riding a wave of great financial results.)
Check out this chart showing profits/losses for the US airline industry by quarter since 2000. 2012 showed the best financial performance (for domestic flying) in those 12 years. Remember how well the airlines were doing in early 2000, when ridiculous dot com growth fueled a major expansion in both service and fares? (Remember paying $2200 to fly from Newark to Dallas? Yeah, me too). In the 2nd quarter of 2000 (when we had more airlines, mind you) airlines showed a profit on domestic flying of $2.7 billion. In the 2nd quarter of 2012, they showed a profit of $3 billion. For 2000 as a whole they showed $5.3 billion vs. $7.5 billion in 2012.
The chart is also interesting because while many people have blamed 9/11 for the woes the industry faced for years, it was getting quite bad before that — Q2 2001 profits were more than $3 billion less than the same quarter in 2000. It was already terrible before 9/11.
Well, that incredible profit growth must have been driven by higher fares, right? No. Check out this chart. In 2012 dollars, average fares in 2000 were $77 HIGHER than they were in 2012. What about fuel? Oh – fuel cost roughly 70 cents a gallon in 2000, vs nearly $3 in 2012.
So what happened? I was a bit disingenuous when I said that fares were lower in 2012 — they were, but that does not take into account the $3.5 billion in baggage fees and $2.6 billion in change fees the airlines generated last year. Ancillary fees — which, ironically enough, were started by the low fare carriers — have been an enormous help for airlines who felt a bit restricted with how much they could raise fares (2012 fares were only 3% higher than 2011). But consumers, though they complain about them, will pay ancillary charges, and that’s fueling profitability.
Plus there were, as many have said in the past, simply too many airlines since deregulation. Typically, new entrants would lower fares to levels where no one could be profitable, drive down everyone’s profitability, then go out of business. That’s a terrible way for an industry to run. Plus, larger carriers — because there were so many of them — fought for market share by lowering fares, which simply drove profits lower. Consolidation has driven airlines to make much smarter pricing decisions (something the America West/US Airways team is, at least in significant part, responsible for), which has allowed the airline to – gasp – make money while offering a reasonably priced service.
In addition, the not-particularly-smart lowfare carriers have disappeared, leaving very, very smart airlines like Allegiant and Spirit to run businesses profitably while offering significantly lower fares than those offered by legacy airlines. That actually BENEFITS legacy carriers, because those airlines offer a differentiated product — plenty of people don’t want to fly Spirit, so they’ll pay a premium to fly United (or whomever).
Add the ability to print frequent flyer miles through credit card signups and the industry – for consumers and the airlines themselves – is about as healthy as it’s been in 30 years. (I don’t want to hear about how planes are more crowded – they are, but get over it — if you’d like an empty seat next to you, buy a second seat). And the security stuff sucks, I get it – it’s not the airlines’ fault. Enjoy your cheap flights, unlimited upgrades, and 75,000 mile credit card bonuses.