Fuller Planes, More Fees, Lower Fuel Costs Drive Airlines Profitability
ThinkstockThis was never going to be a boom year for the airlines. The world’s air carriers managed a profit of $7.6 billion in 2012, about 1.2% of industry revenues. The International Air Transport Association (IATA) now estimates that airlines’ revenues…
This was never going to be a boom year for the airlines. The world’s air carriers managed a profit of $7.6 billion in 2012, about 1.2% of industry revenues. The International Air Transport Association (IATA) now estimates that airlines’ revenues will total $711 billion in 2013 and profits will rise to $12.7 billion, for a profit margin of about 1.8%.
Weak as that is, if the forecast turns out to be true it will mark the third-best year for airline profits since 2001, trailing a profit margin of 3.3% in 2010 and 2.9% in 2007.
More efficient use of resources gets the credit for the anticipated increase, according to the IATA. Load factor — the ratio of revenue passenger miles to available seat miles — is expected to reach an all-time industry high of 80.3% in 2013. But IATA points out the real secret:
[A]irlines have found new sources of value that have increased the contribution of ancillary revenues from 0.5% in 2007 to over 5% in 2013. … For the first time in history, the industry load factor is expected to average above 80% for the year. And with ancillary revenues topping 5%, it is clear that airlines have found new ways to add value to the travel experience and to shore-up the bottom line.
Those “ancillary revenues” are fees, for everything from baggage check fees to pillow and blanket fees. As for adding value, well, that is purely a subjective judgment.
Fuel costs are projected to decline from an average of $111.80 a barrel to $108 a barrel, which also helps. Fuel consumes about a third of an airline’s total costs, so any downward movement in fuel costs is a major boon to the airlines.
Fewer and fuller flights combined with lower fuel costs and more fee revenues are keeping the airlines aloft.
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Paul Ausick has been writing for 247Wallst.com for more than a decade. He has written extensively on investing in the energy, defense, and technology sectors. In a previous life, he wrote technical documentation and managed a marketing communications group in Silicon Valley.
He has a bachelor's degree in English from the University of Chicago and now lives in Montana, where he fishes for trout in the summer and stays inside during the winter.
