The four big carriers reported 2Q results last week. Here are a few thoughts:
- They all made money. As the WSJ reported (paywall), “Those announcements came as American, United and Southwest reported record-setting second-quarter results, building on Delta’s solid performance a day earlier.”
- How did they do this? Again, the Journal:
Airlines are prospering as mergers have reduced competition, making it easier to keep prices high and raise billions from extra fees. They used bankruptcy to squeeze costs from employees and suppliers such as the smaller carriers that operate regional flights.
- Competition is definitely down. The four legacies now control 82% of domestic capacity.
- Another way they make money is by shrinking themselves down to those routes and those aircraft where they can make a profit. This means fewer flights to fewer destinations, at least domestically.
- If they aren’t investing in new capacity, what are they doing with their money? Well, customer service may be in the pits, but shareholder service is great. All four are buying back shares, and three of the four — all except United — are paying dividends.
- And finally, virtually all the profit made by the four majors came from fees. In other words, the price of the ticket covers just the cost of the seat.* Profit has to come from something else. This raises the interesting question, so beloved of MBA professors, of what business are they actually in?
All this cash is attracting a flurry of start-up activity. As the Journal also reports (paywall), a reincarnated People Express is now flying to Newport News, a route that Southwest abandoned, and a new Paris – Newark all-biz-class service has taken to the skies. Another all-business is preparing for London – NY service. In addition, there’s an attempt to resuscitate the Eastern name, and
Other applicants include a company that wants to fly 581-seat 747 jumbo jets domestically, a charter company that intends to start scheduled service between the U.S. and destinations such as Curaçao and Guyana, and one that wants to base itself in Carlsbad, Calif.
As the Journal notes, it will be tough. Of the 332 new airlines approved by the government since 1978 and which actually operated flights, 68 are still flying. On the other hand, that would give odds of about 20%, which for new business start-ups isn’t bad.
I still feel pretty good about my prediction for Imperial Class. Shrinking down is not a formula for long-term success unless you can redefine the market. The big four, or at least the legacy three, can never be alternatives to the bus, but they might become alternatives to private jets. As for the rest of us, average household incomes have been stagnant for a generation, and median net worth is down (PDF) about 35% (from $87,992 in 2003 to $56,335 in 2013 — mean incomes are down less than 9%, reflecting how how much better the customers for business and Imperial class are doing). So I think that within the next few years, the surviving majors will simply abandon the starving masses.
*It isn’t quite this simple: Airlines don’t charge most of these fees for business / first class, and they also make money from cargo and charters. But the basic point is that without ancillary fees, and at the same fares, the legacies would be just breaking even.