Airlines Returning to Profitability Despite Credit Crisis

If you have taken a flight these days, you will not be surprised with the amount of fees they add to your ticket. Most airlines even charge for the first bag you check-in. Here is the list of all charges in various airlines. Now, the positive is that many airlines are returning to profitability.

Yesterday’s WSJ writes:

But those who check multiple bags, ski equipment or oversized or overweight luggage are paying much, much more — allowing airlines to make a tidy profit. In those instances, baggage fees may yield more profit for the airline than what the carrier is making on the basic passenger ticket...

Customers were paying the fee at other airlines without a backlash. Delta said it wasn’t getting any benefit from not charging the fee. So why not charge it?

Profitability

Airline profits are increasing due to

1. Oil coming down
2. All the cost cutting measures enacted with high oil prices
3. Lower pressure on wages
4. Extra fees that were added (like baggage fees) that are sticky.

All these factors make airlines one of the few sectors that are in the positive territory, the last six months. American (AMR), Delta (DAL), and United (UAUA) have all gained ~40% since June, while the market has tanked 40%. Even considering that they started from a low base due to super-high oil prices, this performance appears relatively good.

Though demand will be coming down with recession, a lot of airlines started downscaling a long time back due to oil prices, and should be better prepared. The lower congestion from lesser demand might improve the overall air experience. Since 2001, the airlines have not added net extra capacity and this has boosted the load factor. Here is the total Seat Miles chart:

[All the charts below are constructed using data from Bureau of Transportation statistics]

The airlines have cut capacities post-September 11 and current capacity looks similar to the one 7 years ago, with a lower population. Thus, load factor has improved and currently, the load factor is around 80% and that looks pretty healthy.

This has improved the revenue per passenger. As you can see, the total revenue passenger miles has grown 2 times since September 11, 2001.

Summary

Airlines are in a stronger position than during the summer. Though they will be hit from reducing demand, they have been preparing for a supply cut down due to oil prices, and one Delta executive even remarked that he can live with lesser passengers more than with $150 oil. It is still not clear how the credit crisis will affect airlines, but for companies that don’t depend a lot on credit markets for cash, they can get a few positives from the current crisis.

Related Article:

Wall Street Journal, November 26, 2008: UAL Soars on Oil, Cash-Reserve News.

Disclosure: No positions in any airline stocks.